How to fund your next home renovation
Have you ever wished that you could spend more time at home renovation to improve your surroundings? You might long for a “sanityshed” where you can do your work outside. Perhaps you envision a family space refresh that will also include space for a family study room.
How to pay for a house remodel
Once you’ve negotiated with contractors and drafted a budget for remodeling, the next step is to find the funds. You can borrow the money or dip into your savings.
Tapping your home equity, even though interest rates are at an all-time low, seems like a smart move. Recent changes to tax law mean that it is less likely that you will be able to deduct the interest. While a booming stock market might have given you a lot of assets to draw from, interest rate reductions mean that your cash in the bank doesn’t do much. That makes tapping your home equity tempting.
Your credit card company continues to offer new ways for you to pay your major expenses. These are the steps to help you evaluate your options and choose what is best for you financial well-being.
Start with the money that you have saved
Your bank account is earning almost nothing if interest rates are low. It’s not a waste of money to use that money for renovations.
Allan Roth is a certified financial planner at Wealth Logic Colorado Springs. He says, “Obviously, it’s the best way of getting funds is to tap into your taxable cash.” You can take a look at your emergency cash reserves to see if there are any that you don’t have.
Roth states that each individual will decide how large an emergency fund they need. “But you should be able sleep well at night.”
Next, find out the value of your house
Consider whether your home might be able to help you pay for the project. Greg McBride is chief financial analyst for Bankrate.com. “It’s a great time to borrow.” “The rising home price has provided homeowners with more equity and mortgage rates have fallen to new records.
It was once that borrowing against your house would earn you a nice tax deduction. Since the 2017 tax reform, this is not as likely. First, most filers do not itemize deductions. You can only deduct home-loan interest if you use it to buy, construct, or significantly improve your home. However, borrowing from your home is very affordable today due to the low interest rates. You have two options.
Cash-Out refinance: Refinance your entire mortgage to a larger loan. You can then take out cash for renovations. In the last year, the average rate for a 30-year-term mortgage has hovered around 3%. McBride says that cash-out refi makes no sense unless you intend to refi anyway. McBride says that refinancing should be considered for everyone, given the unprecedentedly low rates.
Home Equity Line of Credit (HELOC: There are good reasons not to do a cash out refi. You might have refinanced to a low rate. Or you’re deep into repaying your mortgage. Refinancing can help you get out of debt.
Take care when using your retirement funds
You could be subject to a large tax bill if you withdraw money from your retirement account. Income tax will be charged on withdrawals made from a traditional IRA and 401(k) plan. You may also have to pay an early withdrawal penalty if your age is less than 59 1/2. This could make a $30,000 withdrawal less than $20,000 with a 32% federal tax bracket and a 10% penalty.
Roth IRAs, which are funded using after-tax dollars, allow you to withdraw your contributions at any moment without owing taxes and incurring a penalty. But, investing in long-term savings now can reduce how much you have left for retirement.
Borrowing from the account is another option. A lot of workplace retirement plans let you borrow up to $50,000 or 50 percent of your assets against your 401k (k) savings. The interest you owe will be repaid with no penalties or taxes.
Know the Risks of Borrowing against Your Investments
Although stocks and bonds are another source of funding, you’ll still owe taxes on any sale that isn’t in your retirement account. You can also borrow against your portfolio value (known as a margin loan).
Rates can be variable and vary depending on the amount of your loan. Margin loans are extremely risky. Margin loans are highly risky because the stock value you borrow against could fall sharply. In this case, you may have to either quickly return money to your account or sell certain investments to make more cash.
You could even put it on credit
You will pay much more on your credit card interest rates if you are financing a large-scale home renovation than you would on a mortgage. While you may be tempted to get a 0% introductory rate or balance transfer deal, tougher credit standards have made it harder for those deals to become available (you can search them on Bankrate.com).
McBride also says that “you’re playing a little with fire,” A 0 percent balance transfer rate can be a problem because it doesn’t apply to new expenses. A card that offers a 0 percent balance transfer rate is a good option. However, it can be difficult to control your spending and make sure you pay the balance off before the interest rate goes up again.
A big-ticket purchase, such as a pro-style range of equipment or HVAC equipment, is enough. Flexible payment plans have been offered by credit card issuers to cardholders. These include American Express’s Pay It Plan It option (Chase’s My Chase Plan), Citibank’s Citi Flex Loans and Chase’s My Chase Plan. Programs such as these provide fixed monthly payments for a period of three to 18 month.
There may be a fixed monthly fee or a fixed rate charged, rather than fluctuating interest. While the appeal of a loan is not having to apply for one, fees are an additional cost. For your safety, ensure that you are able to make the payment on time. If you miss a payment, you may be subject to higher fees.