How to Know When to Take Out a Home Renovation Loan

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. This allows 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. This ensures that they are up-to-date on current trends and holding a premium place in the eye of prospective buyers.

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.

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. If you live in an area prone to natural disasters, taking out a home renovation loan may be worth the investment.

Is Now the Right Time to Take Out a Home Renovation Loan?

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. Then use 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.