Here’s how to think about paying for your next renewal.
- Charging renewals to a credit card may seem like a good solution.
- There may be a cheaper way to tackle your next project, like tapping into your home equity or using a personal loan.
Maybe you are tired of looking at your outdated kitchen day after day. Or maybe you’re desperate for a game room now that your kids are growing up and you’re ready to finish your basement.
There are many benefits to improving your home. First of all, you have to take into account your personal enjoyment. And then you have to think about the resale value. Even if you don’t get your entire investment back when you sell your home, it’s likely to increase in value when you renovate it.
But many people can’t afford to pay for a renovation, especially a big one that costs many thousands of dollars. If that’s the boat you’re in, you may be thinking of charging your next project to a credit card. But before you do, consider your other options.
The downside of using a credit card for renovations
If you have a credit card with a generous spending limit, you may be tempted to use it for home improvements. But be careful. Using a credit card for renewals could mean signing up to spend a lot of money on interest.
Now, an exception may be if you expect a windfall and also qualify for a credit card with a 0% introductory APR. Let’s say you’re doing a $10,000 renewal this summer and you qualify for a 0% interest rate offer for 12 months. Let’s also assume that you normally get a year-end bonus at work that is enough to pay off that type of balance.
In that case, using a credit card might make sense. But for the most part, there are less expensive ways to finance home improvements.
Options worth considering
These days, many homeowners have a lot of equity in their properties. That’s because home values have risen substantially nationally.
If you have capital to draw on, you might consider borrowing through a home equity loan instead of using a credit card. Chances are you’ll get a much lower interest rate on the amount you’re borrowing.
Now, sometimes a home equity line of credit, or HELOC, can make sense for renovations. Right now, however, that is not the case.
Consumer interest rates are expected to continue to rise this year, and with a HELOC, the interest rate on the amount you borrow may change. When you get a home equity loan, you get a fixed interest rate on the amount you borrow, which means you won’t have to worry about your loan becoming more expensive to repay over time.
There’s also a personal loan to take into account for renewal purposes. A personal loan may have a higher interest rate than a home equity loan, but that way, you’re not borrowing against your home. Some people don’t like the idea of tapping into home equity, and if you have an excellent credit score, a personal loan could end up being an affordable means of obtaining a loan.
Also, while many homeowners have equity in their properties now, not all do. So if you’re in that boat, a personal loan might be a good bet.
Evaluate your options
A credit card may seem like a solid option for financing home improvements. But in many cases, that will mean paying more interest than necessary.
Remember, too, that using too much of your available revolving credit could hurt your credit score, even if you can make your credit card payments on time. And that’s just one more reason to take a different route when financing renovations.
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