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Whether you plan on emptying your bathroom or putting in some new landscaping, chances are you are digging into your own pockets to pay the price.
A recent TD Bank survey found that over 90 percent of consumers surveyed plan to use their own savings to cover home improvement projects.
âThe public is asking ‘How can I renovate my house in the most cost effective way?’ âSaid Jon Giles, head of home equity loans at TD Bank. “But we’ve also found that a large portion of the population is unaware of existing home equity products.”
The bank interviewed 100 consumers at the Philadelphia Home Show earlier this month.
Although the sample size is small, the results may reflect a larger trend.
In fact, fewer people overall have taken out home equity lines of credit or HELOCs, which allow you to borrow against the value of your home.
According to ATTOM Data Solutions, 313,744 HELOCs were created in the third quarter of 2018, which represents a decrease of 11% compared to the previous year.
Rising interest rates maybe the culprit.
HELOCs generally have adjustable interest rates and fluctuate with the federal funds rate. Right now, the average rate on a HELOC is 5.54 percent.
Here are some financing methods you can consider to cover your home improvement expenses.
Carpenters build a new patio at the back of an 1840s house they are renovating in Cohasset, Massachusetts.
MÃ©lanie Stetson | Christian Science Monitor | Getty Images
If you are planning to renovate your home in stages, but don’t want to run the risk of an interest rate hike over time, consider asking your bank for a HELOC with a fixed rate option.
These so-called hybrid HELOCs allow you to convert part of the amount you have borrowed into a fixed rate that you will repay over a specified period of time.
âThis line of credit is revolving, and there is a lot of flexibility to borrow and repay the loan as cash flow permits,â said Greg McBride, chief financial analyst for Bankrate.com. “This is conducive to home improvements which can be initiated in stages.”
Home equity loans often have a fixed rate, which currently averages around 8.76%, according to Bankrate.com.
This can be a good option for someone who is covering the bill for a large upfront expense, as you receive the loan proceeds as a lump sum, without drawing out as much as you need as you would with a margin of. credit.
Be aware that when you take out a HELOC or a home equity loan, you can benefit from tax relief, as long as you detail it on your tax return.
Under the Tax Cuts and Jobs Act, you can deduct interest on home equity loans and HELOCs as long as you use the money to buy, build, or significantly improve your home.
As of 2018, you can deduct interest on up to $ 750,000 of qualifying home loans, which includes mortgages and loans against your equity.
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If you have sterling credit and don’t necessarily want to borrow against your home, you may want to consider a personal loan.
The average rate on a personal loan for a borrower with a credit score between 720 and 850 is 9.8%, according to Bankrate.com. Those with a credit score below 629 could be required to pay an average rate of 28.2%.
Be aware that personal loans are not qualified home loans, so you will not be able to take advantage of the tax relief you would get for interest on HELOCs, home equity loans, and mortgages. On the flip side, your home is not collateral against the loan and lenders cannot foreclose on your home if you don’t pay.
Contractors sometimes offer homeowners the option of paying for large projects in installments, especially if it’s a major renovation like an addition to your home.
In this case, you and your contractor would craft an agreement in which you pay for the project as it is completed.
Be careful here and be sure to read the fine print of your contract, experts advise. Keep an eye out for fluctuating interest rates and hidden fees associated with your payment plan.
Another potential problem when you renovate: A contractor can put a building lien on your home until you’ve paid for the full amount. Lien is a claim against your home. In this case, the contractor can file a claim against your property to protect it in the event that you do not pay the invoice, which could prevent a sale.
âIf you are going to have a lien on your home, then why not just go for a home equity line of credit which will give you more flexibility and the potential for tax deductibility,â McBride said.
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