By: Remodeling Costs: How Do I Pay For It?
To keep remodeling costs under control, there are four key remodeling cost drivers: The design of the remodel, the materials you use, who manages the project, and how you pay for it.
Let’s review common ways to pay for your remodel and the pros and cons of each.
1. Loan against retirement account (e.g. 401k)
Pros: You pay yourself the interest on a loan against your 401k.
Cons: You lose the interest you could be making if it was invested. If you lose your job, most loans require you to pay the loan back immediately, and there can be significant income tax consequences.
2. Home Equity Loan
Pros: Usually tax deductible. Lump sum is paid to you at the start so you have flexibility of what you do with the money.
Cons: A second loan to manage. Shorter term than a standard mortgage. Requires that you have sufficient equity in your home. You have to pay interest on the entire loan amount even though you may not need the money to pay for remodeling right away.
3. Home Equity Line of Credit
Pros: You only borrow the money you need at the time, so finance charges are lower at the beginning.
Cons: A second loan to manage. Shorter term than a standard mortgage. Requires that you have sufficient equity in your home.
4. Construction Loan
Pros: Good for larger remodel projects and if you don't have enough home equity to qualify for a loan to cover construction costs.
Cons: Higher interest rate than home equity loans. Not tax deductible. Usually short term until construction is complete and then is replaced with a new first mortgage, which may have processing fees or closing costs.
5. Loan from the contractor
Pros: Available to most homeowners.
Cons: High interest rates. Not the best terms. Can lock you into working with a specific contractor. Not recommended.
6. Refinance and cash out
Pros: You only have a single loan for your home. Usually tax deductible interest. A single larger loan will usually have the lowest interest rate.
Cons: Requires that you have sufficient equity in your home. You have to pay interest on the entire loan amount even though you may not need the money to pay for remodeling right away. May have significant closing costs.
7. Credit Cards
Pros: Most homeowners have this as an alternative.
Cons: High interest rate, not tax deductible.
8. Your savings
Pros: The least expensive way to pay for your remodel.
Cons: Make sure you don't use all of your savings. Always have some available for emergencies.
