Nailing Down the Cost of Home ImprovementsSubmitted by Prosperity Planning, Inc on October 19th, 2016
Are you ready to embark on that home improvement project you’ve been considering? Before you jump in, it is important to have a complete and detailed budget thought out. Once a home improvement project is started, it is the norm for costs to run over. So budget carefully, but add a 20% cushion in case it's needed. Once you have created your budget you should consider if this project makes sense for your home, your neighborhood, and its future homeowner. It is even a good idea to talk to a real estate agent before a major project so they can give you an idea whether it’s an investment you can recapture when you sell your house. Once you have determined if it makes sense to improve your home, you will have to decide how to pay for it. Let’s consider your best option for covering the costs of your project.
Paying cash. This option won’t burden you with new debt, but if the projected cost of the project exceeds available cash reserves you may need to consider financing it another way. If you determine you’re able to pay cash, consider pulling that money from an account with the lowest interest rate first and leaving as much money as possible in the higher yielding accounts where it can continue earning interest.
Taking out a loan. A home improvement loan offered by a bank, credit union, or mortgage company usually comes in lump sum with a set payment period, amount, and frequency. Some benefits of this method are that you can claim an income tax deduction on the interest paid on a home loan and can wrap the loan and its payments into an existing mortgage. You could also use a home equity line of credit. A bank provides a HELOC by using your home as a collateral. They will also set the maximum amount you can borrow, the interest rate, and the withdrawal term. This method allows you the flexibility as to when and how much you can withdraw as long as you make minimum monthly payments, however you assume the risk of variable interest rate rising, unlike a fixed loan.
Using your 401k. Proceed with caution. Borrowing from your own retirement funds should really be a last resort or something to consider in a true emergency.
Using credit. A credit card that is offering a zero-interest or very low-interest deal can make sense for financing part of the project such as the purchase of appliances, carpeting, or construction materials. Be sure to read the fine print associated with the offer because low interest rates can jump if you don’t follow payment guidelines.
Seek help. A CFP® professional can advise you on these important decisions. Contact us for a consultation.