Undertaking home repairs can be costly, regardless of whether they are for cosmetic upgrades or emergency repairs. In fact, the average cost of home repairs in the US is between $17,000 and $50,000.
While it is true that home improvement costs are inflating, it doesn’t mean that you’re out of options if you need to undertake emergency repairs or simply want to upgrade your living spaces.
In this article, we will explore several different ways you can pay for your dream home renovations that won’t leave you with an empty pocket.
Understanding the Current Landscape
With Americans spending an average of $22,000 on a single home renovation, you may be wondering why the costs are so high. The increase in home renovation costs in the United States can be attributed to several factors, including the following:
- Global supply chain disruptions and shortages have significantly impacted the availability and prices of materials, driving up the costs of home renovations. For instance, cement and concrete prices increased by 5% between Q2 2022 and Q3 2022. In addition, this is a 15% increase from Q3 2021.
- Labor shortages in the construction industry have exacerbated the problem, with fewer workers available to complete projects. This has led to increased labor costs and longer project timelines, further contributing to the rise in renovation costs. For instance, the construction industry experienced a 5.5% increase in hourly wages in 2022 compared to 2021.
- The cost of construction materials increased by 14.1% in 2021. In 2023, material costs rose by another 3% from 2022.
6 Practical Financial Solutions
Despite the rising costs of home renovations, these projects aren’t completely out of reach for homeowners. There are several financing options available. Here’s how you can finance your home renovations without breaking the bank.
Home improvement loans are personal loans specifically intended for financing renovations, repairs, or improvements. Home improvement loans can be used for a wide variety of projects including, but not limited to, remodeling kitchens or bathrooms, adding a new room, landscaping, yard designing, roofing, or installing a new heating or cooling system.
Loan amounts often range up to $100,000, though most lenders set their maximum amount at $50,000. Interest rates for personal loans, which include home improvement loans, generally range from 5% to 36%. Loan terms typically range from one year to 15 years.
Personal loans, like the ones for home improvements, are typically offered by established banks. As a result, homeowners with good credit scores may qualify for higher loan amounts with lower interest rates and longer repayment terms.
Others may turn to alternative, online lenders as they may offer more flexibility and lower minimum credit score requirements. These lenders may be willing to work with credit damaged homeowners, increasing the likelihood they qualify for home improvement financing.
Home equity loans can be an efficient way to access a large sum of money, using the equity you’ve accumulated in your home as collateral. Equity refers to the portion of the home that you truly own as opposed to what you still owe on your mortgage. It represents the current value of the home minus any outstanding mortgage balances or other liens against the property.
It’s often termed as a “second mortgage” since it’s a separate loan on top of the primary mortgage. Home equity loans usually come with fixed rates, ensuring the interest remains unchanged throughout the loan term. Home equity interest rates typically range between 3.5% and 9.25%.
Home equity loans can provide homeowners with up to $400,000, which can be used to finance substantial home renovations or other large-sum expenses without restrictions. Typical repayment terms for home equity loans are 10, 15, 20, or 30 years.
Most lenders will require homeowners to have adequate equity in their homes to be eligible for this financing option, which is typically between 15% and 20%.
Home Equity Lines of Credit (HELOC)
Like a home equity loan, a HELOC allows homeowners to borrow against their home’s value, with the home serving as collateral. Unlike a home equity loan, which provides a lump sum, a HELOC offers a credit limit from which homeowners can borrow, similar to a credit card.
HELOCs provide a flexible source of funds, allowing homeowners to draw from the credit line as needed for various renovation projects. Interest is only paid on the funds used, further making it a cost-effective financing option.
The funds from a HELOC can be used to cover general home renovations, additions, and expansions, roofing and HVAC updates, landscaping, or cosmetic improvements. HELOC amounts can range between $15,000 and $400,000, with variable interest rates that typically run between 7% and 10%.
HELOCs have two terms: a draw period, often 10 years, during which you can borrow against the credit line, and a repayment period, which could last several years, during which the borrowed amount plus interest must be repaid.
Like home equity loans, lenders will often require you to have around 15% to 20% equity in the home in addition to a good credit score.
Rather than searching for financing with a traditional bank or lender, homeowners can finance their renovations through the contractor undertaking the project. Not all contractors offer financing, but some provide funding options directly to their clients, offering more convenience.
Contractors can offer various types of financing, including instalments, lines of credit, and payment plans. Loan amounts, terms, and interest rates vary depending on the contractor and the homeowner’s credit and financial situation.
Some contractor lenders will partner with third-party financing providers that offer a network of lenders. These lenders may be willing to work with a wider range of credit scores, increasing the likelihood that applicants find home renovation financing.
Typically, loan amounts range from $1,000 to $500,000 with two to 12-year terms and interest rates starting as low as 4%. Depending on the contractor, the funds may be used for general home renovations like kitchen remodels or specific upgrades like pool additions and window replacements.
If you are faced with a smaller sum emergency renovation, such as a broken water heater or appliance, a credit card can be a go-to option. In fact, many home improvement and appliance retailers offer store credit cards that come with 0% introductory APR. For instance, homeowners who need to replace a broken refrigerator can apply for a credit card in-store at Best Buy, which offers 0% APR for 24 months.
Many homeowners can apply for credit while at checkout and, if approved, can use their new credit card to purchase home upgrades. For smaller sums that can be paid off within the introductory period, credit cards can be a cost-effective financing option for home renovation projects.
However, keep in mind that interest rates will increase after the promotional period to around 20% and above.
Government Grants and Rebates
Government grants and rebates for home renovations are financial incentives offered by federal, state, or local governments to assist homeowners in repairing, upgrading, or improving their homes. These financial incentives do not need to be rapid, unlike HELOCs and credit cards.
Homeowners can search for grants and rebates through the Housing and Urban Development (HUD) office or check with the National Residential Improvement Association (NRIA).
Often, homeowners will need to qualify for grants by being a part of a specified group or meeting certain low-income and disability requirements. Some government grants and rebates for home renovations include the following:
- Section 504 Home Repair Program: This is a government-backed grant program that provides funding to low-income, elderly, and disabled homeowners to repair and modernize single-family homes. The grant can be used to replace or repair insulation, foundations, and septic systems. Also, funds can cover health, safety, and energy-efficient improvements.
- VA Specially Adapted Housing Grant: This financing option is specifically designed for veterans who suffer from service-related disabilities. These homeowners can qualify for up to $109,986 and use the funds to cover a range of accessibility projects like widening doorways and adding wheelchair ramps.
- Native American Housing Improvement Program: Specially designed for individuals who are members of indigenous tribes, these grants offer up to $60,000. The funds can be used for repairs and renovations to improve properties and bring them up to code.
- Area Agency on Aging: Seniors can access funds through this grant program to repair or modify their homes to make them more accessible. This financing program is backed by the HUD.
Even though home renovations are becoming more expensive, you shouldn’t let the increasing costs deter you from making much-needed changes to your house. Renovations can make your house more comfortable, modernized, and energy-efficient, and they can ultimately increase its value.
Whatever your financial situation might be, there could be a financing option out there that can help you upgrade your home.0