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Home Renovations: When to Borrow and When to Save

Posted by: LBS Financial on April 12, 2023

You’ve planned the renovation, gotten quotes and even put a plan into action. However, one question still remains: should you borrow or tap into your savings to finance the renovation? When it comes to financing a home renovation project, it’s important that you review all of your options before deciding how you want to pay for the work.

When to Use Savings

The best time to use your savings is when you have extra funds that can be put aside for the future. When we say “extra” we are suggesting that you do not tap into your emergency savings fund or retirement savings. Using your own money is the lowest costing option for your project since you won’t have to pay any interest as you would with borrowing.  However, if you don’t have enough savings to pay upfront, you’ll need to create a plan to save enough, which could delay the timeline of the project. Therefore, this option may not work for projects that require immediate attention such as repairing drywall or the ceiling, or fixing a leaky roof. It would be a good idea to use this option on small, less expensive and less urgent projects first—unless you are an expert saver and have been planning for a particular renovation for years.

When to Borrow

The best time to borrow is when you have a good to excellent credit score, and a guaranteed income stream—like a steady job with a solid pay scale—that will allow you to pay back the loan over time. This will help ensure that you qualify for a great rate, don’t end up with an unmanageable debt or find yourself unable to make payments on time. A popular option is to use your home’s equity.

A home equity loan is a type of personal loan that allows you to borrow money against the value of your home. A home equity line of credit (HELOC) is similar in that it allows you to borrow money against the value of your home, however it is a revolving line of credit, and is more similar to a credit card. It is important to know that your home will be used as collateral, which could impact your home ownership if you fall behind on payments. Also interest rates on HELOCs are variable, meaning they will rise and drop depending on the prime rate.

Financing for a home renovation will always take time and planning. It’s important you consider your options, compare lenders and rates, and choose the option that is best for your situation.

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