3 Ways to Pay For Your Home Improvement Project

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This post, “3 Ways to Pay For Your Home Improvement Project, was written by Dan and June, the founders of Dinks.co, a blog highlighting their journey as a “dual income, no kids” couple.

There comes a time in the life of every homeowner in which it is time to tackle a major home improvement project. For us, that time came this past fall when we had to install new windows throughout our house.

The cost of this project was steep (new window installation cost averages over $5,000), leaving us with the question of how exactly we would pay for it. As a younger married couple, we have other debt obligations, such as our mortgage and student loans. We have an emergency savings fund, but it isn’t enough to cover a $5,000 project.

But we didn’t have much of an option to delay this project; our existing windows were old and leaking air. They were inefficient in terms of energy and were costing us a bundle in heating and cooling bills.

We knew that we would recoup the cost of the windows over the long-term in energy savings. We also knew that the overall value of our home would increase by installing new windows, as the existing windows weren’t just drafty — they were unattractive. So despite it putting us in a financial pinch, we knew that we would have to come up with a way of paying for the project.

3 Smart Options to Pay for Your Home Improvement Project

While it would have been ideal, paying cash for our new windows simply was not an option, so we needed to find a credit solution. With the bulk of our monthly budget devoted to mortgage, student loan, bill payments, and retirement savings, we had several alternatives to cash for our window project: a home equity line of credit, a personal loan, or a credit card.

Ultimately, we had to pick one form of credit over another with our financial health in mind.

1. Take Out a Home Equity Line of Credit

What is a home equity line of credit?

A home equity line of credit allows a homeowner to borrow money against the value of his or her home. In essence, you are taking out a loan against the part of the house that you have already paid off — the equity. A home equity line of credit is secured by the house itself as collateral.

Unlike other types of loans, the entire home equity loan amount is not advanced once the loan is granted. Instead, the borrower can take out sums from the line of credit up to the credit limit during the term of the loan.

Repayment is usually required on a monthly basis, with the full amount borrowed due at the end of the loan period. Home equity lines of credit usually have variable interest rates, which can sometimes be a great advantage to borrowers.

Examining this option for our situation

For us, a home equity line of credit would mean tapping into the equity that we have established in our house in order to improve our home. It could make sense as a way to improve our house, provided that we qualify.

Yet it could also be a bit worrisome — leveraging equity isn’t without risk, and agreeing to a variable interest rate loan is always a bit of an unknown.

2. Take Out a Personal Loan

Personal loans are loans offered by banks, credit unions, and other financial institutions that can be used for almost any reason, including home improvement projects. They can be secured by collateral or unsecured, and secured loans typically offer lower interest rates.

Personal loans are repaid on an installment basis, with principal payments plus interest due each month. The interest rates for personal loans are based on the borrower’s credit history and whether the loan is secured or unsecured.

Examining this option for our situation

A personal loan appealed to us, as we already are used to making monthly payments on student loans, our mortgage, and car payments. If we could qualify for a good interest rate, it could be a straightforward way to obtain a relatively small amount of funds at a fairly low interest rate.

3. Opening Up a New Credit Card

A credit card can be used for most purchases, including to pay for your home improvement project. Opening up a new credit card with a low interest rate or that offers perks such as travel rewards could be a great idea for a home improvement project, as it can be a way to get credit for a relatively low interest rate (possibly 0 percent for a short-term) or with good benefits (such as free travel) as long as you are able to pay off the balance before the interest rate rises.

Examining this option for our situation

Using a credit card to pay for our windows made sense in a lot of ways, especially if we could get a card with a 0 percent introductory annual percentage rate (APR) or one that offered a lot of benefits for using it. After all, it could be a really nice bonus to getting new windows if we also got to go on a vacation as a result of having home improvement work done.

However, we did worry that we wouldn’t be able to pay off the balance on time. Also, we had concerns that having credit card debt could sink us financially.

Why We Chose a Personal Loan to Pay for Our Project

Ultimately, we chose to take out a personal loan to pay for our new windows. For us, a personal loan made the most sense both as a financial matter and as a personal matter. We are accustomed to making monthly payments, and adding another would not be overwhelming to us; in fact, we could easily manage that payment.

We also thought that it seemed appropriate to get a personal loan for a relatively small amount like $5,000 for this home improvement project, rather than dipping into the equity on our home through a home equity line of credit. In the future, we may need to take out a line of credit on our home for a bigger project, but for a fairly small amount of money, we didn’t think that it was necessary to do so.

Finally, we were also wary of taking on revolving debt through a credit card. Even if we qualified for a low or no interest card, there was still the possibility that we wouldn’t pay off the debt before the introductory period was over — leaving us on the hook for a balance with a significant interest rate of 15 percent or higher.

And while the idea of rewards is enticing, we know that it isn’t worth getting into credit card debt for a trip.

The Benefits of Using a Personal Loan to Pay For Your Home Improvement Project

Looking back, paying for our home improvement project with a personal loan has been a good choice for us. Not only have we enjoyed lower energy costs this year, but we have taken advantage of a relatively low cost financing option that has allowed us to enhance our house and improve its efficiency.