Whether you have invested in a fixer-upper or simply need to perform routine maintenance on your current home, renovations are a necessary part of the home ownership process.
The reality, though, is that when these renovations start running tens of thousands of dollars, most homeowners simply do not have enough cash on hand to cover the costs of home improvement and are tempted to explore home renovation loans.
While a home renovation loan can certainly be a prudent move, the homeowner needs to have a clear understanding of the purpose of the renovations before borrowing can be deemed a sound financial decision.
Personal Finance 101 teaches that running a loan to the end of its term, whether it be an auto loan or mortgage, will see interest constitute a significant portion of the final cost.
Home renovation loans are no different and should be chiefly considered for projects that will drastically increase the overall value of the home, with an eye on short-term selling once the renovation is completed.
This makes home renovation loans a valuable tool for home flippers who look to buy, renovate, and sell properties in the span of 3 to 6 months, quickly paying off the mortgage and any home improvement loans with the profits from the capital gains without letting significant interest expenses accrue.
Another instance in which a home improvement loan makes sense is when you’re in a hot real estate area and are looking to and/or are willing to move. There are a number of renovations that can significantly increase the value of a home.
For instance, if a home is a near-lock to sell in a hot market once listed, and quartz countertop costs have been analyzed in comparison to the significant value quartz surfaces add to a home, then it can be a lucrative proposition to take out the loan, make the upgrade, and pay it off in cash after the home sells. There are also various quartz countertop colors to choose from, just make sure to pick a popular one that appeals to buyers such as white, brown, blue or grey.
Avoid Renovation Loans for Personal Projects
If you have no plans or interest in selling and are simply looking to make home improvements for convenience or personal pleasure, do not take out a home renovation loan. If you do not have enough cash on hand to pay for the project, either pay for it as you go, or wait until you have saved enough to pay in full.
Examples include expanding closet space in a master bedroom or moving a kitchen wall to accommodate for a larger refrigerator.
Sure, these renovations will make the home more desirable, but if you’re not looking to sell quickly at a gain, then the cost of the home improvement loan will undermine the benefits these upgrades provide.
Renovations to Increase Livability may be Necessary
There are some instances in which home improvements cannot be avoided. For example, a homeowner should not wait and save to repair a significant roof leak, as this will often lead to the need for subsequent repairs and cause heating costs to elevate.
As such, it would be recommended to take out a home renovation loan to invest in some composite shingles to solve the problem, as the cost could be recouped in future savings.
Other renovation projects that require immediate attention and could make a loan worthwhile include:
- Installation of Polyiso roof insulation to lower heating and cooling costs
- Replacing windows that do not seal air and moisture
- Sealing pipe leaks that will undermine the foundation and framing of a home
While homeowner’s insurance can cut a check in the wake of a natural disaster, it can never truly replace what you love. If you are in a particularly high-risk area, it may be a good idea to take out a loan to protect your home in the face of danger.
Some ideas include fire-resistant roofing and siding in dry, heavily-forested areas and improved driveway drainage to protect against concrete erosion and foundation damage where heavy rains and flooding are known to pervade.
Renovations in the Current Economic Climate
The Covid-19 pandemic has many people more concerned with putting food on the table than renovating their homes. However, if you are in a position where a renovation is unavoidable, there are a couple of points to keep in mind.
First, many home improvements are financed through unsecured personal loans. Not only do these loans typically carry high rates, but some lending institutions are raising the rates further to capitalize on people who are desperate for cash as a result of the crisis, so tread very lightly in this area.
If you have time to wait, a sound idea may be to refinance your mortgage. Mortgage rates have recently reached an all-time low due to uncertainty in the housing market as a result of the pandemic.
You could then put the cash difference from your refinance toward the renovation. Just be aware that refinance times are extended in the current climate, as underwriters have been swarmed with an influx of requests.
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.