How to Know When to Take Out a Home Renovation Loan
The investment aspect of homeownership is one of the primary reasons people decide to buy real estate. Despite a handful of housing crises and soft markets over the decades, properties have generally seen steady increases in value when held for at least five years, allowing homeowners to sell at a significantly higher price than they bought.
However, as one of the least liquid assets available to invest in, homes must be properly maintained, repaired, and remodeled to ensure that they are staying up-to-date on current trends and holding a premium place in the eye of prospective buyers.
When these renovations run into the tens of thousands of dollars, though, available cash becomes a real issue for most homeowners, who may consider taking out a home renovation loan to complete the necessary work. This may or may not be a good idea, with the following tips offering advice on when a home improvement loan may be prudent.
Take Out a Home Renovation Loan When the Goal is to Sell Quickly
A basic understanding of personal finance is knowing that when running a loan to the end of its term, a significant portion of the total payment will be interest. This is exacerbated by the fact that most home renovation loans will be unsecured personal loans, meaning that a conservative interest rate will be around 10%, but possibly much higher.
Therefore, if you are planning a value-adding renovation to your home, but plan on living in the home for the next 10 years, then any value the renovation added will likely be outstripped by the interest paid on the renovation loan.
However, if you plan on selling your house quickly, preferably within six months, and have a sound estimate on the price increase the renovation can bring to your home, then taking out a loan can be a great idea. In this case, you would be able to use the capital gains from the house sale to pay the loan in full before significant interest accrues, making home renovation loans prevalent among house flippers who like to buy fixer-uppers and remodel like crazy to sell in a three to six-month window.
Some value-adding renovations that may be worth taking out a loan to help your home sell quickly include:
- Finishing an energy-efficient add-on that is framed with an insulated concrete tilt up wall construction
- Replacing kitchen countertops with classy, nonporous materials, such as quartz or solid surface
- Upgrading the roof with synthetic F-wave shingles
Do Not Take Out a Home Renovation Loan for Personal Projects
While turning your home into your dream home as soon as possible is a respectable goal, it probably does not make much financial sense if it involves taking out a loan to make it a reality. That luxurious master bathroom can turn your house into a personal oasis, but it will be very pricey by the time the loan is paid off.
A better plan for these types of renovations is to take them in a step-by-step manner as you save some cash. Continuing with the master bathroom example, start by adding acrylic countertops to the vanity area and move on with other small projects, such as replacing old-fashioned cabinets with trendy towel shelves, until the whole area is remodeled. While this approach will take a little longer, the enjoyment you eventually get will be compounded by the financial value added.
Loans for Safety Concerns Should be Considered Necessary
Although homeowner’s insurance will give you some financial relief, it can never truly replace a lost home. As such, if you live in an area prone to natural disasters, taking out a home renovation loan may be worth the investment.
For example, if you live in areas such as Colorado or California that are notorious for wildfires capable of raging for months, do not leave your home sitting there with untreated wood siding. Take out the loan and upgrade to steel siding to protect your home as much as possible. Similarly, those homes in lowland areas of Florida or South Carolina should consider a loan to upgrade their driveway drainage to mitigate the risk of flooding.
Is Now the Right Time to Take Out a Home Renovation Loan?
With the current COVID-19 crisis, many cash-strapped individuals have turned to personal loans as a means of getting some available cash. This makes it possible that those trying to take out an unsecured personal loan for home improvements may get gouged by banks looking to capitalize on this demand.
If the interest rates you are getting quoted are unpalatable, consider refinancing your mortgage and using the equity from the refinance to fund the home renovation. While personal loan rates may be high, mortgage rates are near record lows, meaning that not only can this strategy get you some cash for your remodel, but it can help lower your future mortgage payments.
Matt Lee is the owner of the Innovative Building Materials blog and a content writer for the building materials industry. He is focused on helping fellow homeowners, contractors, and architects discover materials and methods of construction that save money, improve energy efficiency, and increase property value.
Interested in a Cash Out Refinance Loan? Give our office a call. A licensed loan officer will be more than willing to go over our different loan programs. Interest rates in 2020 have been extremely low. Now is the time to do all those home improvement projects you have been thinking about doing.
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