Here are four options to consider if you’re thinking about making some home improvements:
1 – Pay Cash
You could pay cash for the improvements if you have the money in a checking or savings account. There are two drawbacks to consider before you go this route:
•Savings Depletion: a large home improvement project could quickly deplete your savings. Think about this project in the context of the next 3-5 years. What other large expenses could crop up during that time period, and would it be useful to keep your savings on hand for those items?
•Opportunity Cost: would it more useful to invest that money in a college savings plan or retirement account? For example, if a home improvement loan costs less than what you’re earning in your investment accounts, you may be better off investing your money instead of paying cash for the improvements. Talk to your financial advisor for more details.
2 – Use Credit Cards
Some credit cards have very low introductory interest rates that last for a certain period of time. You could potentially tap into those offers if you’re confident that you can pay off the card(s) before the introductory period expires. The drawback with this option is that life happens, and you may not be able to pay off the card quickly as you initially thought. In that case, your interest rate could quickly skyrocket.
3 – Cash-out Mortgage Refinance
You may be able to take out a larger mortgage and receive some extra cash at the closing. House prices have improved in many markets, so some homeowners have enough equity in their homes to do this. Also, interest rates are still very attractive, so you may end up with a very similar rate to the one you have now. The main drawback with this option is that you may have closing costs and/or a higher interest rate with the new mortgage. In any case, it’s probably worth exploring.
4 – Home Equity Loan or Line of Credit
A home equity loan or line of credit is basically a “second mortgage” that you take on the house. You would leave your current mortgage as is, and you would add a second mortgage with its own set of interest rates, payments and terms. The main drawback with this option is that interest rates and monthly payments are typically higher than first mortgages.
So, there you have it! These are four ways to pay for home improvements. Contact me for further details or to explore your mortgage options.
John Lemos, CMPS
Certified Mortgage Advisor
Cell: (951) 256-0812
Direct: (714) 613-1664
Fax: (714) 844-9263