Interior painting. Bathroom remodels. New Flooring.
According to the 2020 State of Home Spending report, these were the top three most common home improvement projects participants had completed. It’s not surprising that painting was at the top of the list, as it is one of the most cost-effective and impactful home improvement or renovation projects.
Many of your clients may find the idea of home renovation to be exciting. Choosing new flooring, picking out countertops, and deciding on new light fixtures can be fun. However, all that enjoyment can sometimes be overshadowed by the obvious question they’ll need to answer before any work gets started: How will we pay for it?
Whether your client is looking to renovate a home they’ve been living in for years or seeking to make improvements to a house you just helped them purchase, they may turn to you for some advice. As a well-rounded real estate agent, you can be an excellent resource for them when it comes to remodeling tips and determining the best financial strategy to help them get the most out of their project.
To help prepare you for those conversations, we’ll discuss five “how to pay for home renovations” tips you can share with them. Because each client’s situation is unique, specific strategies are better for some than others. But they’ll appreciate you offering them options they can explore to help them pay for the renovations they need or want.
Paying for renovations in cash might be an option for some of your clients. The ones most likely to consider this option would be those who have a separate emergency fund saved or those who can save what they need before repairs become critical.
Paying for renovations with cash is the best plan if it’s possible. If the improvements can wait, suggest to your client that they start saving in advance so when that rainy day comes, they won’t have to borrow money to pay for critical renovations.
In certain circumstances, using cash to fund renovations may not be the best idea. It’s nice to have cash ready to use for other expenses or investments that are important. Your clients may need it to start a new business, invest in a retirement plan or help pay for their children’s college education. All these are just as important (or more) as a home renovation.
2. Credit cards
Although it can be a slippery slope, homeowners could pay for renovations with credit cards. If the improvements are minor and your client is disciplined enough to pay off credit card balances monthly, it could work.
This strategy could pay off if they use cards that are interest-free for the first few months. For example, if they are using a 0 percent introductory APR card, they could potentially pay for minor home improvements without ever paying interest. They could even get some cash back perks if the card they’re using offers those kinds of rewards.
The risks are apparent. If your client can’t pay off the balance monthly or before the introductory rate runs out, they’ll be stuck paying significant interest. That means that the renovation project just got much more expensive.
3. Renovation loans
Here’s another option you can introduce to your client – a renovation loan. If you have a client, who’s been house hunting and finding home options that could be what they’re looking for after a few renovations, keep reading.
There are a couple of different types of renovation loans, including an FHA 203k Renovation Loan. With these loans, your client could borrow up to 96.5 percent of the appraised value of the home they are buying — based on the value when the improvements or repairs are completed.
These renovation loans are insured by the Federal Housing Administration (FHA) and allow a prospective homebuyer to borrow cash for the home purchase and the improvement/renovation projects done after the home is purchased. It’s all part of one loan. And this way of funding home renovations could save a borrower thousands in interest.
Possible cons to this approach are that it can involve loads of paperwork and the lender has to approve all the renovations, which could make your client feel uncomfortable and take some of the fun out of the project.
Here is an example of a borrower who chooses to pay for a home remodel with a renovation loan as compared to charging the project on a high-interest credit card:
- Home price: $100,000
- Remodeling costs: $50,000
- Total loan amount: $150,000
- Additional funds needed to remodel: $0
- 6.625% Interest on $50,000 for 15-year loan: $33,423
Total renovation costs: $83,423
- Home price: $100,000
- Remodeling costs: $50,000
- Total loan amount: $100,000
- Additional funds needed to remodel: $50,000
- 18% interest on $50,000 for 15 years: $94,398
Total renovation costs: $144,398
Result: Borrower pays an additional $60,975 using a credit card to pay for the remodeling project.
4. Home remodel or home repair loan
Your client could fund a renovation using a home improvement loan, which is an unsecured personal loan offered by banks and credit unions. Since these loans are unsecured, your client doesn’t need to use the house as collateral.
Another benefit of this type of loan is that funding comes quickly – once terms are agreed on, many lenders deposit money to the borrower’s account within 24 hours.
Home repair loans are usually best for small or midsize home projects such as a bathroom makeover or window replacement.
One con to consider when using these loans to pay for home renovations is that because the home isn’t used as collateral, the loans typically have higher rates than other loans. That’s especially true if your client has fair or poor credit. Also, some lenders charge application fees, late payments, and even prepayments on a remodel loan.
5. Home equity line of credit (HELOC)
For those who have built up some equity in their home, a home equity line of credit could be an option to consider for funding home renovation projects.
There are several advantages to using this resource:
- Their home backs a home equity line of credit, so your client can qualify for lower interest rates than with a personal loan
- A home equity line of credit is revolving credit, which means the client can take only what they need when you need it
- For ongoing renovation projects, a home equity line of credit may be a solid home repair loan option because it allows for quick access to funds
The danger of a home equity line of credit comes if the borrower runs into problems making the loan payment. The house is the collateral, so it could be foreclosed if they don’t make payments on time.
Completing home renovation projects can leave your clients feeling satisfied with the new look of their homes. But unless they choose a smart way to fund them, they could spend years (and thousands of extra dollars) paying off the improvements.
You can help them figure out which strategy is best for them by sharing these options with them and connecting them with a lender who can provide more detailed information for their specific circumstances.
2021 True Cost Report – HomeAdvisor. Home Improvement Tips & Advice from HomeAdvisor. (n.d.). https://www.homeadvisor.com/r/true-cost-report/.
Gundersen, H. (n.d.). How To Pay For Home Improvements. Bankrate. https://www.bankrate.com/loans/home-improvement/how-to-pay-for-home-improvements/.
Eight smart ways to pay for home renovations. Framework. (n.d.). https://www.frameworkhomeownership.org/blog/eight-smart-ways-to-pay-for-home-renovations.