There are many aspects of a home remodeling project that are flexible. You can choose the wall colors you prefer, the number of inches to move a wall, and whether to overhaul the kitchen or install a new window design. However, there’s one aspect of home improvement that you have hardly any wiggle room on: spending money.
There can be no foundation poured, wire run, PEX line laid or nail hammered without cash. Fortunately, there are several ways you can pay for a kitchen and bath remodeling. We’ll start from the simplest and move to the more complex.
Personal Liquid Assets
If you already have a sizeable amount of cash and easily liquidated assets such as savings accounts, checking accounts, CDs and savings bonds nearing maturity, you are ready to hit the ground running. Cash is the simplest, cleanest and most ideal way to pay for a home improvement project.
You aren’t beholden to anyone so how, when and where you spend the money is entirely up to you. No need to worry about fees, interest rates and other charges. The downside is that most people don’t have plenty of cash and cash equivalents sitting around waiting to be tapped for this purpose.
Friends and Family
Friends and family can contribute in two ways: cash and sweat equity. Raising cash from your social circle would be a feasible option only if you need to remodel as a matter of great urgency and have no other option (for instance, due to sudden safety and health concerns). Money can strain relationships so you don’t want to call on your loved ones when you don’t really need to.
Sweat equity is however a fun way you can benefit from them. For the price of a takeout pizza and a six-pack, your friends and loved ones could put in the work in your renovation project. Except for the snacks, the labor will be virtually free. The downside is that since they might not be experienced or professionals, the quality of the work may not be up to scratch.
Home Improvement Program (HIP) Loans
HIP loans are available from your county. While they aren’t truly free, they do come fairly close. Counties will subsidize part or all the interest on your loan in an effort to preserve the quality, usability, safety and value of local housing stock. HIPs are capped at $50,000.
They have a couple of drawbacks though. For instance, you need to pay the increased taxes that result from the home improvement. The HIP subsidy also comes with plenty of red-tape including strict timelines for completion, regular project monitoring and narrow definitions of what’s eligible (luxury items such as hot tubs and swimming pools are not covered).
Home Equity Line of Credit (HELOC) and Home Equity Loans
HELOCs and home equity loans use home equity as collateral. Home equity loans (effectively a second mortgage) are available when the value of the home exceeds the existing (first) mortgage. The loan is issued as a lump sum and the homeowner begins repaying the loan immediately via monthly payments and within a fixed period.
HELOCs are more flexible. You get a proportion of your home equity as a credit line with a well-defined draw period. As opposed to the home equity loan where you receive a one-off lump sum that you need to start repaying immediately, you can draw down on the HELOC multiple times and in amounts of your choosing as long as they are within the limit.
Within the draw period (usually 5 to 10 years) you are not required to make repayments. When the draw period ends, the repayment period begins. You’ll be expected to start making monthly payments for a set term that could run from anywhere between 10 and 20 years.
These are not your only options for financing home remodeling but they are the most commonly used. Other alternatives for financing worth exploring include credit cards, personal loans, contractor lending, federal solar energy incentive programs, FHA Title 1 home improvement loans, borrowing from a 401(k) and security backed lines of credit.