Financing Your Home Renovation: Cash vs. Loans

Are you thinking about a home renovation? Let's talk about financing that reno. The big decision is, do we pay cash or do we finance it? So when it comes down to paying for your renovations, you really have basically two choices. Using your own savings or borrowing money to do that reno. If you've got enough savings set aside, paying upfront means you avoid interest, cost, debt, but dipping into your saving is isn't always the best move, especially if it means leaving yourself without a financial cushion. This could hurt you in the long run. On the other hand, borrowing money through loans, lines of credit or home equity gives you flexibility, but it also comes with a cost. The key is knowing when financing makes sense and when it doesn't.

When Does Financing Make Sense?

Not all renovations are created equal. Some projects add value to your home while others are more about personal enjoyment. For example, if you're converting your basement into a rental unit, that is a great reason to finance because the rental income will help cover the cost of the loan. But if you're adding a luxury feature like let's say an inground pool, high-end finishes a brand new kitchen, brand new bathrooms, you need to ask yourself will this add long-term value or is it just personal preference? This is a question you really have to think about before you start your renovations.

Loan Options for Renovations

If you decide that financing is the right move, here are the main options:

1. Home Equity Line of Credit (HELOC):

   • This is one of the most flexible ways to borrow against your home's value. You only pay interest on what you use and as you pay down your mortgage your available credit increases over time1.

2. Personal Loans:

   • This one is good for say medium-sized renovations. These have fixed payments and interest rates so you know exactly what you owe each and every month as your renovation is going on2.

3. Credit Cards:

   • This one can be a little bit risky if it's a large project because you're going to be paying a lot higher interest rates, but can be useful for short-term expenses if you can pay off the balance quickly without having to pay those high interest rates1.

4. Retailer Financing:

   • Some home improvement stores offer financing for renovations, appliances, or even big purchases with repayment plans up to 5 years. Just be careful on this one because the 5 years can come up pretty quickly1.

Be Ready for Unexpected Costs

Sometimes this is something that we overlook. We don't think of. If there's one thing every homeowner learns is that renovations rarely go as planned. Expect the unexpected! Experts recommend that you always budget for the unexpected surprise costs, like structural issues, permits, material increasing or the material you're looking for is not available so you have to substitute it. So make sure you do plan for these unexpected costs. All of these items can force you to to dip into extra credit or extra savings. Having a financial buffer is always key when you're doing these renovations1.

Avoid the Debt Traps

While loans can be useful taking on debt without a solid plan is very risky. Before committing, ask yourself: Can I comfortably afford the monthly payments, is my income stable enough to handle this debt, and what happens if the interest rates rise? Remember if your budget is already stretched, now might not be the best time to borrow for that renovation, although you really need or want this renovation to happen1.

Does the Renovation Add Value?

One of the biggest questions I ask all my clients is will this renovation increase your home's value? If the answer is yes, like adding a rental unit, upgrading a kitchen or improving Energy Efficiency, financing might make sense for this one but if the project is purely for lifestyle enjoyment you need to be okay with the fact that you might not see that money again when you sell. The nice thing is that you do get to enjoy these new renovations and if you're planning on staying there for a long time then, you can afford it, your budget makes sense, you can go for it1.

Should You Finance Your Home Renovations?

It really depends on your goals, your budget, and whether the investment will pay off in the long run. Don't forget to like subscribe and hit that bell so you don't miss any future videos about real estate and home ownership.