When Fall Maintenance Fails.... Financing Home Improvements

Even the most skilled and dedicated handyperson can extend the life expectancy of many elements of a house or condo for only so long.

One day, the roof's going to need some serious attention or even replacing. And the same goes for sidings, furnaces, air conditioners, kitchen units, bathrooms... the list is endless. When that day comes, you may need to think seriously about how to pay the big bills that almost inevitably result from such projects. As always, the cheapest way to do that is to pay cash and not borrow at all. But for many that's just not an option.

Home Equity and Home Improvements

The "equity" you have in your home is the current market value of the property less the amount you owe on your mortgage(s). Assuming that's a reasonably substantial number, there's a good chance you can borrow against a significant proportion of it, and doing so for home improvements is widely regarded as a sensible use of your assets.

The three most common ways to access your equity are cash-out refinancing, a home equity loan or a home equity line of credit (HELOC). If you're a senior, you may have the fourth option of a reverse mortgage.

Be aware that all these forms of borrowing are secured by your home: If you overextend yourself and fail to keep up payments, you could face foreclosure. But, precisely because they are secured by your home, these loans are almost always much more affordable than other forms of credit. Indeed, the interest rates charged can be a fraction of those levied on personal loans, credit cards and so on. However, they each have their pros and cons:

1. Home equity loan:

  • Often (but not always) comes with a fixed rate
  • Usually requires closing costs
  • Is a one-time loan -- if you need to borrow more later, you have to start from scratch.

2. Home equity line of credit:

  • Come with variable interest rates, which can make budgeting less safe and predictable
  • Generally are cheaper to set up
  • Can be used and reused, similar to credit cards
  • You pay interest only on what you use.

3. Cash-out Refinancing:

  • Carries the lowest interest rate and the repayment is spread over a longer period
  • Involves replacing your mortgage with a new and bigger mortgage
  • Closing costs can be quite high
  • Overall cost can be higher because of longer repayment

None of these choices is necessarily objectively better than the others. Which is right for you is likely to depend on your personal circumstances. It's always important to take seriously any borrowing that's secured by your home, and it's worth clicking on those links, above, to learn as much as you can about your options

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