With more people working from home, families are struggling to upgrade their home offices or convert a garage or unfinished basement into a usable space to get their work done. It’s hard to work if you can’t get away from the family, but if you can create a dedicated work space within your existing home, chances are you will be less distracted and more productive.
While it may be tempting to pull out a credit card during a home renovation to earn those wonderful sky miles, this option is generally not the best way to finance mid- to large-scale home improvement projects.
If you can sit down and accurately calculate every screw, nail, board, paintbrush, etc., you will need, and know in the end you can pay off that credit card at the end of the month, then maybe proceed with the credit card option. But often the project is just too big for the DIYer to calculate accurately. We have some pretty good guesses about the cost, but not down to the finest detail. And those details can add up to some really big expenses in the end, and may push us into having unpaid credit card bills with high interest rates.
A Home Equity Line of Credit (HELOC) is generally considered the best way to finance mid to large-scale projects. A HELOC uses the equity in your home as collateral.
Here’s how a HELOC can work for you:
You’ll save money because you aren’t taking out a large lump sum all at once for the entire project. This means you won’t pay interest on that entire lump sum. Instead, you withdraw funds in increments based on where you are in the project and how much you need for that phase.
HELOCs generally have flexible terms, including varying interest rates and repayment terms. This means that instead of paying credit card rates of up to 20%, you are keeping that cost a lot lower. Plus, to keep your costs down during the project phase, many lenders require borrowers to make only interest payments during this draw phase. Once the draw period is over, you begin paying on the principal. This can be a helpful benefit in certain situations.
Getting the most return on your renovation project: Make sure it adds value to your home. If you are going to take out a HELOC, make sure you get a good return on your time and money if you have to sell the house down the line. There is a difference between the “appeal” of a home and its actual “value.” While changing the color of the tile from blue to cream might increase the “appeal” of the home, it does little in changing the value it will appraise for. Finishing an unfinished space, such as a basement, will add to your home’s value and appeal, with the added benefit of having the structure already in place as a starting point. Likewise, home additions, which increase the home’s square footage, are generally safe investments of your time and money as long as you go through the permit process and have copies of the permits on hand for the sale.