These days, it's often more affordable to improve your existing home – or even do major renovations – than it is to move into a new home. Not only can improving your home's aesthetic and functional appeal increase resale value, but it also makes your home more pleasant to live in.
However, financing such projects isn't as easy as it used to be. Here are four ways you can get financing to remodel your home:
1. Home equity loan
A home equity loan can be a good way to finance a remodeling project if you have sufficient equity in your home and a good credit score. Many people prefer this option to a home equity line of credit (HELOC) because a home equity loan comes with a fixed interest rate. With a HELOC, however, the rate is variable.
2. Home improvement credit card
Lowe's and Home Depot often offer a 0% introductory APR on their credit cards, as well as other promotions to cardholders throughout the year. Create a plan to pay off the entire balance within the introductory period on any card to avoid high interest charges.
However, if the introductory period is too short with a home improvement credit card, see if you qualify for a card with a longer introductory period. For example, the Citi Simplicity Card offers a o% APR for the first 18 months.
3. 401k loan
Borrowing from your 401k is not something you want to do without serious consideration. Be sure to understand the terms and conditions of your plan provider, as you must pay interest on the money you borrow. Furthermore, you have to pay it back within the time specified; otherwise, you'll pay a hefty 10% penalty and taxes on the amount you owe. Still, if you don't qualify for other forms of financing – or only qualify at high interest rates – this may be your best option.
4. Roth IRA withdrawal
If you've been contributing to a Roth IRA, you can access your contributions at any time without paying a penalty or taxes. This is because with the Roth IRA, you've already paid tax on those contributions. However, if you make withdrawals in excess of what you contribute, you will be charged taxes and a 10% penalty on that amount.
Technically, you are not borrowing the funds, but are making a withdrawal. Therefore, you do not need to put that money back into your account. Therefore, it's extremely important to implement a plan to return the amount you withdraw within a defined period of time, and to hold yourself accountable to it.
In order to finance your home improvement project, you need to have an idea of how much it's going to cost you. Before you begin, do the necessary research, establish spending limits, find a good contractor, and then hold them to their proposals – cost overruns can kill you.
Next, start paying the money you borrow back right away. To save extra money to put toward your debt, clip coupons to save at the grocery store, adjust your thermostat to save on home energy, and drop your landline phone if you can get by with just a cell phone. Not only will these measures help you pay your loan off quicker, but they'll help you save money in the long run.
What other financing methods have you used to remodel your home?
David Bakke is a contributor for Money Crashers Personal Finance. He provides tips for managing money, planning for retirement, and saving for big expenses like home improvements.