When planning minor or major home renovations, budgeting is an important step in the process. While small repairs or renovations may not require much financial planning, a larger home improvement, such as installing new kitchen cabinets, often involve more thought when it comes to budgeting.

Many options are available finance your home remodeling project, so consider the benefits of each as your plan your renovation.

Cash

Cash is the easiest and cheapest way to fund your home remodeling project, but some homeowners don’t have sufficient savings to cover a major update. If you do, also consider how much of your nest egg you’ll need to drain in order to complete the project.

If paying in cash will mean you’ll no longer have a safety net for emergencies, you may be better off using an inexpensive form of credit to complete your kitchen renovation, bathroom update, or window installation.

PRO TIP: Is there ever a time paying with cash isn’t the best option? Yes! If you can find a 0% financing option, it may be better to let your savings continue to accrue interest and use the free credit to pay for the renovation.

Credit Cards

Using credit cards to complete a home renovation isn’t usually a good idea, but there are some exceptions. If you know you can pay off the entire project within a short period—no longer than six months or so—and it’s a renovation that can’t wait, using a credit card is a decent option.

If you think you’ll be able to pay it off in six months and the renovation can wait, put the project on hold, set the money aside, and pay in cash to avoid paying the 20% interest.

The other time using credit cards is acceptable is when you have an offer for 0% interest. Of course, you’ll want to be sure you can pay it off before the 0% interest offer expires, but many cards are offering no interest for up to 18 months, making it easier to pay it off before the interest kicks in.

PRO TIP: Use a card with generous cash back or travel rewards to gain an extra benefit from using a 0% interest card for your home improvement project.

Bank Loan

When you need to finance a moderate size renovation, a bank loan is another option to consider. Since this type of loan usually has a lower interest rate than credit cards, and a firm end-date for paying it off, it’s a smarter choice than a credit card. Shop around for the best loan rate rather than only applying at your own bank to ensure you get the best deal.

PRO TIP: Be sure to do all of your rate shopping within 14 days to avoid a negative impact to your credit due to multiple inquiries. Credit bureaus allow for rate shopping, and will count all applications made within a short period as one inquiry. The shopping window varies from 14 to 45 days, so keep it to 14 days to be safe. Note that this doesn’t count for credit card applications which are each treated as individual inquiries.

Home Equity Loan

Taking a home equity loan can be a great idea or a huge mistake. Many homeowners are tempted by the low monthly rate, but they fail to consider they’ll be paying for that bathroom update for the next 10-20 years—and paying thousands of dollars in interest over that time.

Still, there are some cases when a home equity loan is a smart choice including if you’ll be able to pay much more than the minimum monthly payment and pay the loan off early.

Also worth considering is that the interest rates for a home equity loan are much lower than for many other types of loans and certainly lower than the average credit card. If you know you’ll be able to pay off the loan within a few years, you’ll be able to save significantly on interest with a home equity loan.

PRO TIP: A HELOC (home equity line of credit) may offer a more favorable interest rate than a home equity loan, so inquire about both if you decide to go this route.

Contractor Financing

Most home remodeling contractors offer some type of financing, and the terms are often quite good. You may even be able to get 0% financing options which will move contractor financing to the top of list of smart ways to pay for your renovation.

PRO TIP: Avoid no-payments-for-12-months type offers unless you absolutely need the renovation immediately and have no other choice. Interest accrues during the no-payment period making this a quite expensive form of credit.

Cabinet Restylers offers budget-friendly kitchen renovations, and we’re happy to discuss financing options with you. Contact us for more information or to schedule an in-home consultation.