Financing Home Improvement Projects During Coronavirus

Coronavirus (COVID-19), Housing Finances Financing Home Improvement Projects During Coronavirus

Many of us are home much more than usual these days, and you may be thinking about ways to improve your home — whether it’s expanding your new home office, upgrading your air conditioning, or putting in a new swimming pool for the summer. It’s easy to dream about those fun new projects, but figuring out how to pay for them can be a challenge.

It’s not just your lifestyle that’s been impacted by the coronavirus pandemic. Many banks, lenders, and fintech companies are changing the way they lend money to customers, so your options for financing a home improvement project may have changed.

In the first few months of the coronavirus outbreak in the United States, many lenders pulled back on Home Equity Lines of Credit and Cash Out Refinances — either halting new applications or tightening the approval criteria. The best financing options may be changing based on what’s available at a given time, so take the time to investigate what is going on in the market and what your options are. Here’s a place to start.

This article will walk you through:

  • Key questions to ask yourself when evaluating your financing options
  • 5 financing options you might be considering, and the pros and cons of each option
    • HELOC
    • Cash-out Refi
    • Personal Loan
    • Traditional Credit Card
    • Fintech Alternatives

What questions should you ask yourself when choosing a financing option for your home improvement project?

  1. Are you in a hurry to get started? Do you need to replace a major appliance immediately, or do you have some time before construction begins? Some financing is faster than others, but you may pay a price for speed.
  2. Will your costs happen all at once or overtime? If your project will have ongoing costs (like many home improvement endeavors) it might be attractive to only pay interest on what you’ve spent and to have the flexibility of revolving credit that allows you to spend, pay it back, and spend again.
  3. Is the cost of your project a sure thing or will it creep up? Even the best budgets have surprises. Choosing a more flexible financing option now may prevent you from having to apply for credit again later, which may save you money and limit hard inquiries which can ding your credit score.
  4. Do you have equity in your home you can tap into? Do you want to? Financing that relies on the equity in your home often has lower interest rates than unsecured options. If you have equity available in your home, are you comfortable using your home as collateral and potentially risking foreclosure if you can’t make your payments?
  5. How much flexibility do you need in your monthly payments? In a time of uncertainty, it may be more attractive to choose an option with fixed rates and payments that you can plan around.
  6. What is available in the market right now? In a time of unprecedented uncertainty, many lenders have temporarily stopped offering certain products or seriously raised the bar for what it takes to qualify. Make sure you aren’t counting on funding from a financing product that isn’t available anymore. What are your financing options? The news about COVID-19 changes daily, so keep in mind that the economy, stock market, and the lending policies of various lenders may change.

What are your financing options?

The news about COVID-19 changes daily, so keep in mind that the economy, stock market and the lending policies of various lenders may change.

1. Home equity line of credit (HELOC)

What is a HELOC and how does it work? A HELOC is a revolving line of credit (like a credit card), which means you can borrow as much as you need, when you need it, up to the limit on your credit line. As you pay down the balance, you can borrow more money again.

Your credit line is based on the equity in your home and your credit, so you must own your home and have some equity built up in order to qualify for a HELOC.

What are the Pros and Cons of a HELOC?

Great for:

  • Projects with ongoing expenses — flexibility to spend, pay down the balance, spend again
  • Paying less interest — lower rates than most unsecured products, and revolving structure where you only pay on the amount you’ve borrowed
  • Tax deductions — some opportunities for a tax deduction of interest, depending on how the funds are used
Not great for:
  • Renters, as they are not eligible for dwelling-secured financing
  • Homeowners worried about foreclosure risk
  • Fast funding — underwriting and appraisal process means it can take weeks to get your money
  • Payment- or rate-sensitive people — rates are typically variable so may rise
  • People looking for financing right now — several banks halted new HELOC applications in May in response to the COVID-19 pandemic so availability may be very limited.
Bottom Line on HELOCs
HELOCs are often one of the more affordable and flexible financing options for home improvement work, but it may be especially difficult to get one in the current environment and the process is lengthy compared to other options.

2. Cash-Out Refinance

What is a cash-out refinance and how does it work? A cash-out refinance is when you replace your existing mortgage with a new mortgage for more than you owe on your home. The difference goes to you in cash, which you can spend on whatever you want.

Your cash out amount is based on the equity in your home and your credit, so you must own your home and have some equity built up in order to qualify for a cash-out refinance.

What are the Pros and Cons of a Cash-Out Refinance?
Great for:
  • Paying less interest–rates typically lower than unsecured products and many HELOCs
  • Simplified, predictable payments — single monthly payment for your mortgage and your home improvement project, with fixed rates widely available
  • Tax deductions — some opportunities for a tax deduction of interest, depending on how the funds are used
Not Great For:
  • Renters, as they are not eligible for dwelling-secured financing
  • Homeowners worried about foreclosure risk
  • Payment- or rate-sensitive people — your rate on your entire mortgage may go up due to a higher loan amount
  • Fast funding — underwriting and appraisal process means it can take weeks to get your money
  • People looking for financing right now — due to COVID-19, many lenders have tightened requirements for mortgages in general and cash-out refis in particular
Bottom Line on Cash-Out Refinancing

Cash-out refinancing can be an affordable, fixed-rate option for financing your home improvement project but the process may take considerably longer than it would have during pre-pandemic days and the requirements may be more stringent.

3. Personal Loans

What is a Personal Loan and how does it work? Personal loans are unsecured loans that you receive as a lump sum of cash to use however you like. They typically have fixed rates and terms, which means you pay the loan back in set installments over a set period of time.

What are the Pros and Cons of a Cash-Out Refinance?

Great For:

  • Fast funding — approval process is fast and usually 100% online
  • Renters, homeowners concerned with foreclosure risk — available regardless of housing status
  • Fixed scope of work — lump sum of cash makes it harder to overspend on your project
  • Better rates than other unsecured options — rates are generally lower than traditional credit cards

Not Great For:

  • Projects with ongoing expenses or unclear scope — lump sum of money can only be used once without borrowing again. May result in additional hard inquiries and a negative impact on your score if you need more credit
  • Paying less interest — you pay interest on your total outstanding balance, regardless of how much you’ve spent
  • Some homeowners — rates are typically higher than secured options

Bottom Line on Personal Loans

Personal loans are a fast and affordable way to borrow a set amount of money. This may be a good fit for a project with a set budget or a lot of one-time, up-front cost.

4. Traditional Credit Cards

What is a traditional credit card and how does it work? Most of us are familiar with traditional credit cards. They are revolving lines of credit, which means you can spend up to your credit limit, and then pay back your outstanding balance and spend again. They can be used wherever credit cards are accepted, and some offer (expensive) cash options as well.

What are the Pros and Cons of a Traditional Credit Card?

Great For:

  • Fast funding — approval process is very fast and many cards are available for instant use
  • Projects with ongoing expenses — the flexibility to spend, pay down the balance, spend again
  • Pay for what you use — revolving structure means you only pay interest on what you’ve spent
  • Potential for attractive short term rates — promotional rates may save you money in interest if you can repay quickly

Not Great For:

  • Paying less interest — higher rates than most other options
  • Predictable payments — rates are typically variable and can rise
  • Overspenders — cards make it easy to overspend and run up unmanageable debt
  • Cash expenses — most cards have very expensive cash advances

Bottom Line on Traditional Credit Cards

Traditional credit cards are ubiquitous but expensive. They offer speed and flexibility compared to many other options but they will almost certainly cost you more money.

5. Fintech Alternatives

What alternatives are available?

Online financial technology (fintech) companies offer a variety of financing alternatives that may work well for your situation. Here are a few examples:

  • Upgrade Card
    • Upgrade Card combines the flexibility of a card (can be used wherever VISA(R) is accepted) with the low cost and predictability of a personal loan (each month, purchases are converted to a fixed-rate installment loan). This option is great for projects with ongoing expenses and for rate-sensitive people looking for quick funding.
  • Affirm or Afterpay
    • These companies offer fixed-rate installment loans at the point of sale at many retailers. This might be a great fit for a home improvement project with a big upfront cost from a single store (for example, new furniture from one retailer) but offers less flexibility than other revolving products.
  • More!
    • Fintech companies are always introducing new products, so it’s worth taking the time to see what else is out there.

Bottom Line

Financing your home improvement project during a pandemic may complicate things, but it doesn’t need to hold you back. Don’t be discouraged if the loan you’d planned to apply for isn’t available — take the time to understand your financing options and keep an open mind. There may still be a great way to get the home office or backyard of your dreams!

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