So far in our series of columns on home improvement and remodeling we’ve covered why it’s a good time to do it: low interest rates, tight housing market, friendly lenders and appraisers.
We also discussed the traditional ways to pay for it: cash if you’re financially independent, borrow against home equity if you’re not.
But since not every homeowner has lots of cash or has accumulated enough home equity, we should talk about some other ways to pay for needed repairs and improvements.
Back to the bank
Depending on your credit score, debt, and income, you may still be able to get a loan from a bank or credit union for home improvements, even if you don’t have any home equity against which to borrow.
The loan may be called a “consumer loan” or some such, but it’s basically an unsecured loan that you promise to pay back.
Because there is no asset (like home equity or a vehicle) backing the loan, you’ll likely pay a higher interest rate than you would if you were borrowing against an asset.
The rate may range from the mid single digits to the mid-teens, depending on the lender and your situation. Also, since it’s not a mortgage, home equity loan, or a home equity line of credit, the term may be shorter (say, three to five years), and the interest won’t be tax deductible.
A car loan for home improvements
Speaking of borrowing against an asset, if you have decent credit and a paid-for vehicle, you may also want to get a new loan secured by that vehicle. The interest rate could be around 4-7%, but again, it’s not tax deductible.
Talk to a couple of lenders, explain your situation, and see what they can do for you. The worst thing they can do is say “no”, which will compel you to move on to other options.
You can also look at an online lender such SunTrust (www.suntrust.com), which has a specific loan program for home improvements made by homeowners with little or no equity.
Another way to pay for home remodeling is with your plastic. Hopefully you already have one or more cards with some room to charge on them. If not, you can talk to your financial institution to see what the can offer, or visit creditcards.com to shop for a new card.
The advantage of using the credit card is that you can charge up what you need when you need it.
But there are several potential drawbacks. First, there is the interest. According to the aforementioned creditcards.com site, the average interest rate charged on credit card balances right now is about 15%.
Then there is the potential hit to your credit score. Bigger balances carried from month to month can reduce your score, which may then incur unexpected expenses (such as higher auto insurance costs), and more difficulty getting a loan in the future.
From your 401k
Another alternative exists in your employer-sponsored retirement plan. Assuming your employer allows loans against plan balances (and most do), you can borrow either the greater of $10,000 or 50% of the vested balance, or $50,000—whichever is less.
There is no credit check or approval process, just some forms required from your HR department or retirement plan provider.
Once you get the check, you pay interest back to yourself. The rate is usually a floating rate, and is tied to some neutral index. Often the interest rate is in the mid-to-high single digits.
Depending on the plan rules, the loan usually has to be paid back in five years--unless you quit your job or get fired or laid off. Then the outstanding balance has to be repaid within 60 days.
If you can’t repay it, the unpaid balance becomes a taxable distribution, and you may owe income taxes on the amount, plus a 10% penalty if you’re under 59 ½.
If that happens, that new granite kitchen countertop or hardwood floors in the living room are going to be hard to resell, and won’t provide much comfort.