Running a home can be a lot of fun. For some people, it feels like a passion project – something that gives you a real zest for life. Unfortunately, though, it’s not cheap. In fact, running a home is probably the costliest thing in your life, even if you no longer have a mortgage. And that can make finding the money to make home improvements a tremendous challenge. Here are some tips for clever ways of financing necessary home improvements.
Why You Need Home Improvements
To Maintain Value
Before we get into a full-blown discussion of some of your options, it’s worth thinking about why home improvements are necessary. For some homeowners, home improvements are necessary to maintain the value of their properties. In general, house prices rise. But if you don’t take care of the structure and interiors, eventually it will depreciate, cutting into your wealth. Letting the odd thing go here and there isn’t usually a big issue. But over time, problems can add up. And eventually, your home becomes a health hazard. Maintaining value could include things like sweeping the gutters, replacing broken roof tiles, and keeping your window frames in good condition. Lots of small jobs add up to a big effect over time.
To Improve Quality Of Life
Sometimes, home improvements are necessary for improving your quality of life. A growing family often means you have to invest in upgraded rooms and even extensions.
To Make Space For More Children
You may also need additional space for extra children. Many people buy homes that are suitable for their lifestyle at the time, but that soon becomes insufficient for their needs.
To Accommodate A Hobby
Lastly, sometimes you need home improvements to accommodate a hobby. For instance, you might want to fund a new garage space for working on a car or a room for playing music. Some people even build outhouses to accommodate all their artwork.
Methods Of Financing Home Improvements
So, with that out of the way, what methods can you use to make improvements in your home? Here are some good ideas.
Use Your Free Cash
When we say “free cash,” we’re not just referring to money stuffed under your mattress or in your checking account. We’re also talking about any money you might have tied up in bonds, stocks, and shares. Remember, while these assets are investments, they are different from other forms of wealth, like real estate. The critical distinguishing factor is that they are liquid, meaning you can access cash immediately. You don’t have to wait for them to “mature” like some finance products. And transaction costs are low, unlike selling a house. There are several advantages of using free cash as well:
- The funding is instantaneous – you don’t have to wait for approval or money to arrive in your bank account. It’s there already
- There aren’t any fees. Your cash is free for you to use how you like
- You don’t have to have a good credit score. Your cash is accessible immediately.
However, there are some downsides to this method too. For instance, you could deplete all your savings, leaving you with very little in reserves. What’s more, you might not have enough money to cover the cost of larger projects. And that could limit your options.
Refinance your mortgage
Another option is to refinance your home. The idea here is to take out a new mortgage on it (or increase the size of your existing one) to free up more cash. Banks love this approach because it provides them with safety. Even if you don’t pay back the loan, they can always repossess the property and recoup their losses. But what does that mean for you?
Well, actually, it’s a good thing. That safety allows the bank to offer you low-interest rates on any money you borrow. So you can often wind up in a situation where you’re paying hardly anything for credit. Most of your repayments are simply going back into building equity in your home.
Are there any downsides to this strategy? Well, some homeowners will find the fact that they have to take out a new mortgage a little annoying. If you’ve just paid it off, you’re probably enjoying your new sense of financial freedom. You don’t want to have to start paying it back all over again. And then there’s the issue that the bank might foreclose on your home, forcing you to move out and live somewhere else if you don’t keep up repayments.
If you own a company, another option is to reroute dividends back into your home instead of company stock.
The way this works is actually quite simple. As a company owner, you usually take salary in the form of dividends and then plow the excess back into your enterprise. But, when making home improvements, you can temporarily increase your dividend takings and then “pay it back” by taking out less next year. Rerouting dividends is something you can ask your accountant about. It’s also something you can do if you own dividend-paying stocks.
Take Out A Personal Loan
Sometimes, you don’t need a huge amount of money to make home improvements: just a few hundred dollars will do the trick. In these cases, you might want to consider taking out a personal loan, especially if you need to carry out essential maintenance (such as replacing a heating and air conditioning system).
There are many different types of personal loans. Some are completely unsecured, which means you don’t need to pledge any of your assets in place of repayments. Others are secured against things you own, like your car or jewelry.
Which you take out is very much a personal choice. Unsecured loans provide you with exceptional flexibility, while secured ones offer lower interest rates as standard.
The amount of money you borrow with a personal loan is actually quite substantial. The only caveat is that you need a strategy for paying it off. For most people, this is easy. You just pay back the money you owe with your paychecks. It’s important, however, to work out well in advance, whether you can pay for any loan by adding it to your existing costs.
Use Your Credit Card
Credit cards are essentially another form of unsecured loan and a great way to fund any renovation projects. Why? Well, it all comes down to your credit score. Credit card companies adjust the amount of interest that you pay depending on the risk they think you pose. If they think the risk is high, they’ll cap your credit and charge you a high rate of interest. However, if you prove to them that they can trust you by always repaying them on time, you can cut the cost of borrowing dramatically.
When it comes to financing home improvements with credit cards, this point is critical. The amount you actually wind up paying depends considerably on your credit score. So if you’re not sure what it is, find out from one of the credit rating agencies. Usually, all you need to do is fill out a form online, and then they will give you your rating automatically, without your inquiry negatively affecting the score itself.
Credit cards offer a couple of advantages that make them helpful. For instance, they allow you to move money quickly, getting it whenever you need it. Accessing credit is just as easy as spending money on your debit card.
Credit cards also allow you to earn lucrative points and rewards. Some people earn tremendous benefits when they use them regularly, such as free home insurance or air miles.
Apply For A Grant
Lastly, you may be able to apply for a grant to make necessary home improvements. For instance, if a member of your household is disabled and you are on a low income, the government may fund certain types of renovations.
The great thing about this method is that you don’t have to pay for it yourself. You simply apply for the grant and then the authorities provide the rest for you. There’s no interest to pay or repayment period. Mostly, you don’t have to return any money at all – unless, perhaps, you experience a sudden and dramatic increase in your income.
We have looked at some of the clever ways you can finance home improvements. It’s worth mentioning that no specific method is better than any other. Each has its advantages and drawbacks. The trick is to find the approach that suits you best. No two homeowners are the same.
For people with a lot of cash in reserves, using existing funds might be the best option. However, for those with good cash flow but low capital, personal loans might be a better option. Remember, whenever you spend money on your home, you’re investing in your future. So any money you spend will eventually come back around. After all, house prices tend to go up over time.