How to pay for home renovations

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Confused about whether to dip into your savings or use your credit card to cover your next big purchase? Email reporter Megan DeMatteo at [email protected] to share your next purchase and question to be part of the new “Cash, credit or loan?” by CNBC Select. series.

Since the onset of the coronavirus pandemic, renovations have become a higher priority for people as we all spend a lot more time at home. A recent study of Groundworks Companies found that 20% of homeowners planned to use their tax refunds for home improvements this year, up from just 10% in 2019.

In the past, the project of transforming the guest room “someday” into an office or adding a patio to your garden might have been a lower priority than, for example, taking a memorable family vacation. But now, as people adjust to the fact that the whole family works, plays and goes to school under one roof, home renovations are less of a luxury than an immediate need.

When you finance such projects, whether it’s a new kitchen or a renovated basement transformed into a classroom, you usually have the option of paying cash, financing the costs with a loan, or paying for it. ‘use a credit card and earn rewards.

CNBC Select spoke with two financial experts to get their advice on how to select the best payment method for your budget.

Mark Reyes, CFP

Los Angeles
Cash, credit or loan? Cash

New owner and Albert financial planner Mark Reyes recently renovated his backyard. Reyes and his wife chose the project as their first major business after the coronavirus hit, and they hope having a nice outdoor space will allow them to see more friends and family safely in 2021.

The couple paid for the project in cash, although they could have used a credit card rewards to earn points or miles.

Paying in cash ensures that you can actually afford the purchases you make and that you don’t end up with what Reyes calls “toxic” (or high interest) debt. This takes patience, as most people need several months or years to save money to pay for a renovation, given the low-end average cost of a kitchen renovation is $ 10,000.

Cash is also generally preferred when hiring local contractors, which was important to Reyes given how hard the recession has hit small business owners. Paying in cash (or by check / electronic check) often costs entrepreneurs less processing fees, and they are often able to access the money more quickly.

To start saving, sign up for a budgeting app like mint or PocketGuard which allows you to create specific savings goals. Deposit your money in a higher yield option like the Ally Online Savings Account, which offers above-average interest rates on all balances, with no minimums and no monthly fees.

But before you decide to spend a lot of money on a home improvement, Reyes suggests asking yourself a few questions to make sure you don’t get confused:

  1. Is there room in your current budget for a one-time or recurring payment? Even if you are paying cash, projects can take months, so build your spending plan based on the payment schedule your contractor sets for you.
  2. Still have enough in your emergency fund? While Reyes advocates using cash for home renovations, he doesn’t recommend dipping into your emergency fund to cover these kinds of costs. Make sure you have at least three to six months of cash set aside before spending thousands of dollars on a major project.
  3. Is your debt under control? If you have high interest debt over your head, but a large amount of money to spend on a home improvement project, it’s probably in your best interest to put the project on hold and pay off the mortgage. debt first. (Here is how much can credit card debt cost you if you only pay the minimum.)

If you meet these requirements, Reyes says you can confidently move forward with the project, especially if the purchase or project will improve your lifestyle.

“A backyard renovation really resonated with us because it was so important,” Reyes said. CNBC Select. “We have a long list of things we want to work on around the house, but we found that due to quarantine a new yard was at the top of our list.”

New owner Mark Reyes and his wife chose to pay cash for a new fence and improved yard to safely accommodate friends and family outside their new home in Los Angeles, California.

Photo courtesy of Mark Reyes, CFP

Jeanne Fisher, CFP

Nashville, Tennessee
Cash, credit or loan? Home Equity Line of Credit (HELOC)

“For home improvement, I’m a huge fan of the home equity line of credit, or a HELOC,” Nashville-based planner, Jeanne Fisher, says CNBC Select.

A HELOC is a revolving line of credit (that is, it stays open, even after you’ve paid off what you’ve borrowed) that is tied to the amount of equity in your home. You won’t get 0% financing, but interest rates tend to be lower since the equity in your home is used as collateral.

Typically, you can only open a HELOC after you’ve accumulated at least 20% of your home equity, and your credit limit will be limited based on how much you’ve paid on your mortgage.

But these considerations aside, HELOCs are a convenient way to access credit when you need it and pay it off on a flexible schedule.

Most notably, using a HELOC helps you keep track of improvements to your home, says Fisher – which will come in handy when you eventually sell the home. Every time you borrow from the renewable HELOC to pay for a project, you create a paper trail documenting how much money you have invested in upgrading your home. A realtor can easily go through your documentation later and turn those upgrades into easy selling points.

Keep in mind that while HELOC interest rates tend to be lower than credit cards (the lowest currently available is 2.49% according to The bank rate), the rates are variable and may increase / decrease from month to month.

Also pay attention to costs associated with opening a HELOC, including the costs of assessing your home’s value and creating the line of credit.

At the end of the line

Before undertaking expensive home renovations, make sure your emergency fund is stable and that you have paid off any high interest debt. If you have the wiggle room in your budget, save to pay for your home’s renovations in cash, or use a renewable HELOC if you need some flexibility.

If a HELOC isn’t realistic for you (either you don’t have enough equity in your home or you don’t want to incur additional costs), consider using a 0% TAP credit card to finance. repairs to your home over a period of several months. With the Chase Freedom Unlimited®, you could benefit from up to 15 months of interest-free financing to cover the cost of your project (beyond this, 14.99% to 23.74% variable APR)

And if you’ve just moved into a large renovator, you might also want to check out a home improvement store map. But store cards may have their drawbacks, such as low credit limits and high interest rates, homeowners with a long to-do list might benefit from the Lowe’s Advantage Credit Card, which offers a daily 5% rebate on qualifying in-store and online purchases.

Lowe’s Advantage credit card information was independently collected by CNBC and was not reviewed or provided by the card issuer prior to posting.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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