When you see the opportunity to upgrade your home for less than what it would cost to buy a new home, it’s easy to think that taking out a home improvement loan is your only viable option. After all, as they say, when life gives you lemons, you make lemonade.
Home improvement loans are designed to help homeowners fund renovations within their existing primary residence so that they can sell their property at a higher price in the future. These loans are not only beneficial, but they tend to be more affordable than other financing options. However, with any type of loan, there are risks and trade-offs. It’s important to understand how a home improvement loan works and what expenses you can expect before signing on the dotted line.
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What to Know Before Taking a Home Improvement Loan
Before you start looking at different loan options, it’s important to know the amount of money you’ll need, the interest rate you can expect, and how long it will take to repay the loan.
If you’re adding a new room to your home, you can estimate the cost of materials by taking a careful look at your local hardware store or online retailer, but you won’t know what it will cost to hire a contractor until you interview them.
Similarly, you might know that you want to replace a furnace, but you won’t know what financing options are available until you work with a few contractors to compare prices.
Timing is Everything
One of the most important considerations for renovating your home is timing. The best time to take out a loan is when the housing market is on its way up because you’ll be able to get the maximum value for the property.
As the housing market rises, home values go up, so you can refinance your loan to get a lower interest rate and pay back less. However, lenders expect that at some point the market will hit a downturn, so they’re likely to charge higher interest rates on loans taken out during a hot housing market.
Renovations That Are Worth Your While
The best renovations to pay for with a home improvement loan are those that add value to your property. For example, if you live in an area where there is a lot of natural flooding, you might want to pay to elevate your home. While an elevation project can cost tens of thousands of dollars, a home improvement loan is likely to carry a lower interest rate than a regular home equity loan.
Similarly, if you live in an area that experiences a lot of tornadoes, you might want to add storm shutters to protect your windows. Storm shutters will add value to your home and protect it from damage during a storm, but storm shutters are not a standard home improvement project.
Key Things to Pay for with a Home Improvement Loan
The majority of a home improvement loan should be dedicated to those renovations that add value to the home. However, there are a few smaller expenses that it’s okay to pay for with a home improvement loan.
Cable and internet providers often offer special deals to homeowners who want to get connected, but you should pay for these expenses out of your own pocket if you plan on moving within a year.
If you live in an area that gets a lot of snow, you might want to pay to add a sidewalk to your property so your neighbors don’t walk down your driveway. However, you should only pay for these small upgrades with a home improvement loan if you plan to stay in your home for 5 years or more.
How Long Until You Break Even?
When calculating the ROI (return on investment) for a home improvement loan, it’s important to factor in the time you’ve lived in your home. If you’ve owned your home for less than five years, then you’ll likely have to take out a regular home equity loan. This type of loan has a lower interest rate than a home improvement loan, but you’ll have to repay it over a longer time period.
If you’ve owned your home for over five years, then you’re eligible for a home equity line of credit (HELOC). This loan allows you to take out more funds at once and repay smaller amounts over a longer period of time.
However, you should remember that all debt has a cost, and these smaller payments over a longer period of time will cost you more in the long run.
Don’t Forget the Hidden Costs
When you’re considering adding a room to your home, you should think about more than just the cost of materials. One of the biggest hidden costs of home improvement projects is air quality.
When you’re planning to cut into your home to install a new foundation, furnace, or other equipment, you risk increasing the amount of indoor air pollution. If you live in an area with high ozone or air pollution, you might want to invest in air filtration systems before installing a new furnace or other equipment.
Similarly, if you live in an area with high pollen, you might want to invest in indoor plants to reduce the amount of pollen in your home.
Takeaway
It’s important to understand the risks and benefits of a home improvement loan before you take out the loan. Home improvement loans can be a great way to fund a major renovation while waiting to sell your home. Just make sure you keep the costs of your renovation in mind so you can pay them off before moving out of your existing home.
If you’re planning to take out a home improvement loan, it’s important to determine which renovations will increase the value of your home. This will help you get the most out of your loan and make it easier to sell your house at a higher price in the future.
