Are you looking to remodel your kitchen or finally complete that home improvement project you’ve always wanted?  With no finance fees or interest payments, paying cash for a home improvement project is the best option. However, if you don’t have enough cash to cover a large home improvement project, you will need to look at other funding options.

With so many funding and loan options available, how do you know which to choose?

Option 1: Home Equity Loan

If you are a homeowner with existing equity, a home equity loan can be your smartest option. Home Equity loans use the value of your home as collateral for the loan. This typically means a lower interest rate and a more substantial loan amount. There may also be some tax benefits (consult your accountant to see if this applies to your loan).

Home equity borrowing can be set up as a loan or a line of credit. With a fixed home equity loan, you receive the money upfront and repay the loan with equal monthly payments over the term. A home equity line of credit (HELOC) is a revolving line of credit, much like a credit card. You make payments only on the amount you borrow, not the full approved amount. A HELOC is ideal for longer-term projects that require you to make multiple draws over time.

There are closing costs and fees associated with a home equity loan, so it’s essential to factor that into your decision. Rate, terms, and fees can vary considerably among lenders. Make sure you shop around for the best loan.

It’s also important to understand the risks associated with a home equity loan. Mainly, if you fail to stick to your monthly payment schedule, you could lose your home. It’s essential to reserve your home equity for projects that improve the value of your home or for something that adds significant value to you or your family. When it comes to home equity loans, don’t borrow more than you need, and don’t overspend.

Option 2: Cash-Out Refinancing

Cash-out refinancing will pay off an existing first mortgage, in addition to releasing money for your home improvements and repairs. Mortgages often carry interest rates lower than either home equity loans or home equity lines of credit. However, the downside is that the closing costs associated with a first mortgage are much higher.

Option 3: Home Improvement Loan

If you don’t have equity in your home to use for collateral, you may want to consider a home improvement loan or an unsecured personal loan. These types of loans are easy to apply for, don’t require any collateral, and tend to offer higher loan amounts than credit cards.

However, interest rates tend to be higher on personal and unsecured loans than they are on home equity loans. Also, because terms and rates differ significantly between these niche loan products, it’s harder to understand what you’re signing. Steer clear of shady offers, especially payday loans. You should compare the terms, APR (annual percentage rate), and other costs associated with each loan to see which one makes the most sense.

Option 4: Credit Card

If you have a smaller home project and good credit, a credit card can be an easy option to finance your project. While credit card interest rates are typically higher than a home equity loan, many companies offer cards with interest-free introductory periods. When this is the case, you get an introductory period to carry a balance without paying any interest. That’s a hard deal to beat! Additionally, there are usually no fees involved with opening a credit card, and many cards have no annual fees.

However, you need to make sure you understand the fees and terms of these credit card offers, and you can fully pay off the debt by the time the offer expires. In this case, you should set up an automatic payment to chip away at it; otherwise, you could end up owing a ton of interest on the full amount when the offer expires.

Option 5: Contractor Lending

Lastly, in many cases, contractors will offer financing options. Depending on the project and the offer, these can be attractive. But, be sure to read the fine print carefully. Once you understand the rates and terms, shop around and compare this option to the ones offered by other lenders.

Whatever your goals are, there are options to help you make your home improvement dreams come true without risking your financial health. If you need help deciding on a payment option, Directions Credit Union’s lending experts are available to find the best loan for you. Contact us for more information.