Paying for your home improvements

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Let’s talk about your borrowing options

Paying cash for home improvements is great but there may be low-cost borrowing options available too, if you need them.

1. Home equity loan

A home equity loan lets you borrow against the equity in your home.

Pros: Interest may be tax-deductible when used for home improvements—interest on up to $750,000 of mortgage and home equity debt, combined, may be deductible for married taxpayers filing jointly1

  • Because the loan is secured by your home, interest rates are lower than those on unsecured loans

Cons: Because the loan is secured by your home, falling behind on payments could lead to foreclosure in a worst-case scenario

2. Home equity line of credit

A home equity line of credit (HELOC) is an open line of credit you can use at any time, for a set number of years, to borrow against home equity.

Pros: Interest may be tax-deductible when used for home improvements—interest on up to $750,000 of mortgage and home equity debt, combined, may be deductible for married taxpayers filing jointly2

  • Typically, HELOCs offer lower interest rates than unsecured loans
  • Flexible and convenient

Cons: May have variable interest rates—which means payments could increase if interest rates go up

  • Falling behind on payments could put your home at risk

3. Cash-out refinance

Refinancing your mortgage allows you to take money out of home equity and start over with a new loan.

Pros: Depending on your original loan terms, you may get a lower interest rate on your new loan if you refinance for a shorter period of time or if prevailing interest rates are low

Cons: You do have to go through the mortgage process again which can include an appraisal and loan fees

  • The cost of a new mortgage may negate the potential advantage of using home equity instead of borrowing
  • You could end up with less favorable terms than your original loan

4. FHA home improvement loan3

The FHA-insured Title 1 Home Improvement Loan can help homeowners without a lot of equity make their home more useful and livable. For a single-family home, you may be able to borrow up to $25,000 for as long as 20 years. You must own the home and the home must have been occupied for at least 90 days.

Pros: May be able to borrow up to $7,500 unsecured by the home

  • There is no credit score or income requirement for loan approval

Cons: The FHA mortgage insurance premium will be included in the cost of the loan

  • May need to verify that the loan proceeds were used for home improvement
  • The loan limit is $25,000

5. Credit card

Credit cards offer an unsecured line of credit. Your credit limit and the interest rate are based on your credit score.

Pros: Convenient and flexible

  • Promotional interest rate offers can make the cost of borrowing low
  • Credit card rewards can pay you back when you spend

Cons: Very high interest rate if you carry a balance from month to month without using a promotional offer

  • Credit cards nearly always have a variable interest rate so if interest rates go up, your rate can go up too

6. Personal loans

A personal loan is a fixed-rate, unsecured loan.

Pros: Fixed interest rate so you always know what your payment will be

Cons: May be fees associated with applying and taking out the loan

  • Interest rates on unsecured loans tend to be higher than those on secured loans
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