According to an industry survey, the value of home renovation projects in Australia increased by seven percent in 2020.
Despite the COVID-19 pandemic, the home improvement sector has remained relatively vibrant. As more people stay home, the need for beautiful and high-functioning homes becomes more felt.
To cover expenses related to such renovations, homeowners are leaning into several home finance options.
Keep reading for five ways you can pay for your home’s improvement needs.
1. Home Repair Loans
A home repair loan, also known as a home improvement loan, is an unsecured personal loan a bank issues. As such, you don’t need to pledge your house as security for the loan.
To qualify, a lender will assess your credit score to determine your eligibility and what interest rate you should pay. On the bright side, a home repair loan is relatively quick financing, and the lender deposits the cash in your bank in 24 to 72 hours.
A home improvement loan is most suitable for small to midsize projects. That’s because the bank will give you between $1,000 to $100,000. If you’re looking at a bathroom makeover, such a loan can work.
Before you head to the bank, though, it’s critical to note that a home improvement loan comes with a shorter repayment period. And since it’s unsecured, such a loan also comes at a higher interest rate.
Some lenders are known to charge loan processing fees, prepayment, and late payment fees on this facility.
2. Home Equity Lines of Credit
A Home Equity Line of Credit (HELOC) allows you to tap into the equity you currently have on your home to get funding. Once your application receives the green light, the lender pays it out as a lump sum.
Since a HELOC revolves, you can borrow the amount you need whenever you need it. After you repay, you can borrow again.
On average, the tenor for such a loan will be between five and 20 years. Furthermore, as a HELOC uses your hours as security, you’ll land lower interest rates.
Your lender will take your home’s value, credit score, and income stream into account when assessing your application.
The difference with a home improvement loan is that the former gives you a fixed interest rate while you get variable interest with a HELOC. The main requirement for a HELOC is that you have at least between 15% to 20% equity on your home to qualify.
If you do get a HELOC, your interest payment will often be tax-deductible. The closing costs will also be minimal, meaning you won’t take too big a shave on the net loan amount.
A HELOC works best if you have a significant, ongoing home improvement project. You get a revolving financial source at a lower rate.
3. Home Equity Loans
Unlike HELOCs, home equity loans are property development loans where you refinance your home using the equity you’ve built up.
Once the lender establishes your home’s value, they can calculate your equity and deposit it as a lump sum. You can get up to 100% of your home equity and repay the loan between a five to 30 year period.
Before the lender gives you the money, they will deduce an amount equal to the outstanding balance on your existing mortgage. What you get is the difference. Additionally, a home equity loan lender won’t settle your current mortgage.
A home equity loan is a secured facility, meaning your house acts as collateral. That means you get to pay a lower interest rate. You’ll repay the loan over a fixed period, and the ledger will charge you a fixed interest rate.
Home equity loans are also tax-deductible, which reduces your overall tax bill. You should consider the facility if you have a substantial renovation project, know precisely how much it will cost, and hold significant equity in your house.
The downside of such financing is that you’ll pay more in closing costs and origination fees.
4. Credit Cards
A credit card is likely the fastest and most straightforward way to pay for home improvements. You’ll also not need to back the financing with your home as collateral.
The challenge with credit card financing is the high interest rate at play. To offset this, look for credit cards that offer a 0% introductory interest rate.
Some credit cards, known as balance transfer credit cards, give you an interest-free period, typically spanning 18 months. If you repay the entire amount within this period, you get a 0% interest rate.
Should you still have an outstanding amount when the grace period expires, you’ll pay a hefty interest fee. If you know precisely how much your home improvements will cost and you’re sure to have the money within the grace period, such cards can be helpful.
With this in mind, credit cards should not be used as long-term financing for home improvement projects. If you do use one in the short term, consider getting a secured loan later to pay off the card, as you’ll pay less interest overall.
5. FHA Title I Loan
The FHA Title I Loan program aspires to empower low and moderate-income homeowners to access no equity home improvement loans. An FHA Title I Loan is treated as a second mortgage with a six-month to 20-year tenor.
FHA Title I Loans offer low but fixed interest rates and eligible homeowners who won’t need a home appraisal. Another advantage of this facility is you don’t need a minimum credit score requirement to qualify.
FHA Title I Loans work best for small improvement projects since you can only borrow up to $25,000 (to improve a single-family home). There’s also an option to get an unsecured loan of up to $7,5000 for small appliances.
Find the Right Home Finance Solution for Your Home
Your home is an investment, and as time goes by, you want to keep adding value to it. With the most appropriate home finance solution at hand, you can implement your dream home improvement project to get more utility from your investment while enjoying your living space.
Home improvement projects can be exciting but costly. Our website gives homeowners and potential buyers the relevant information to help them get the most bang for their buck. Check out more of our content to learn new ways to make your property functionally and aesthetically valuable.