How to Pay for Home Renovations

Unsure whether to dip into your savings or swipe your credit card to cover your next major purchase? Email reporter Megan DeMatteo at [email protected] to share your upcoming purchase and question to be part of CNBC Select’s new “Cash, credit or loan?” series.

Since the onset of the coronavirus pandemic, renovations have become a higher priority for people, as we’re all spending much more time at home. A recent study from Groundworks Companies found that 20% of homeowners plan to use their tax refunds for home improvements this year, compared to just 10% in 2019.

In the past, the plan to “one day” turn the spare bedroom into an office or add a deck to your backyard might have been lower on the priority list than, say, taking a memorable family vacation. But now, as people adapt to having the whole family work, play and go to school under the same roof, home renovations feel like less of a luxury and more of an immediate need.

When financing such large projects, be it a new kitchen or an upgraded basement-turned-schoolroom, you usually have the option to pay cash, finance the costs with a loan or use a credit card and earn rewards.

CNBC Select spoke with two financial experts to get their take on how to select the best payment method for your budget.

Mark Reyes, CFP

Los Angeles
Cash, credit or loan? Cash

New homeowner and Albert financial planner Mark Reyes recently renovated his backyard. Reyes and his wife chose the project as their first major undertaking after the coronavirus hit, and they hope that having a nice outdoor space will allow them to see more of friends and family safely in 2021.

The couple paid for the project in cash, even though they could have used a rewards credit card to earn points or miles.

Paying in cash ensures that you can actually afford the purchases you’re making, and you don’t get stuck with what Reyes calls “toxic” (or high-interest) debt. It requires some patience, as most people need several months or years to save up the money to pay for a renovation, considering the low-end average cost of a kitchen remodel is $10,000.

Cash is also usually preferred when you’re hiring local contractors, which was important to Reyes given how hard the recession has hit small business owners. Paying in cash (or check/e-check) often costs contractors fewer processing fees, and they are often able to access the money faster.

To get a jump-start on saving, sign up for a budgeting app like Mint or PocketGuard that lets you create specific savings goals. Deposit your cash into a higher-yield option like the Ally Online Savings Account, which offers above-average interest rates on all balances, no minimums and zero monthly fees.

But before you decide to drop a lot of cash on a home improvement, Reyes suggests asking yourself a few questions to make sure you’re not getting in over your head:

  1. Is there room in your current budget to afford a one-time or recurring payment? Even if you pay cash, projects can take months, so map out your spending plan according to the payment schedule your contractor lays out for you.
  2. Do you still have enough in your emergency fund? Even though Reyes advocates using cash for home improvements, he does not recommend pulling from your emergency fund to cover these kinds of costs. Make sure you have at least three to six months’ worth of cash put aside before you drop thousands on a major project.
  3. Is your debt under control? If you have high-interest debt hanging over your head, but a large pot of cash to spend on a home improvement project, it’s probably in your best interest to hit “pause” on the project and pay the debt off first. (Here’s how much credit card debt can cost you if you only pay the minimum.)

If you meet these requirements, Reyes says that you can confidently move forward with the project, especially if the purchase or project will improve your lifestyle.

“A backyard renovation really resonated with us because it was very important,” Reyes tells CNBC Select. “We have a laundry list of things that we want to work on in the house, but we found that because of quarantine, a new backyard was at the top of our list.”

New homeowner Mark Reyes and his wife opted to pay in cash for a new fence and upgraded yard to host friends and family safely outside their new home in Los Angeles, Ca.

Photo courtesy of Mark Reyes, CFP

Jeanne Fisher, CFP

Nashville, Tennessee
Cash, credit or loan? Home-equity line of credit (HELOC)

“For home improvement, I’m a big fan of the home equity line of credit, or a HELOC,” Nashville-based planner, Jeanne Fisher, tells CNBC Select.

A HELOC is a revolving credit line (meaning it stays open, even when you’ve paid off what you borrowed) that is tied to the amount of equity you have in your home. You won’t get 0% financing, but interest rates do tend to be lower since your home’s equity is being used as collateral.

Typically, you can open a HELOC only after you’ve built up at least 20% equity in the home, and your credit limit will be limited based on how much you’ve paid on your mortgage.

But with these considerations aside, HELOCs are a convenient way to access credit when you need it and pay it back over a flexible timeline.

Most notably, using a HELOC helps you track your home improvements, argues Fisher — which will come in handy when you eventually sell the home. Every time you borrow from the revolving HELOC to pay for a project, you create a paper trail documenting how much money you put into upgrading your home. A realtor can easily look at your documentation later and turn those upgrades into easy selling points.

Keep in mind that, while HELOC interest rates tend to be lower than credit cards (the lowest available right now is 2.49% according to Bankrate), rates are variable and can increase/decrease from month to month.

Also watch out for fees associated with opening a HELOC, including costs to appraise your home’s value and originate the credit line.

Bottom line

Before you take on costly home improvements, make sure your emergency fund is stable and you’ve paid off any high-interest debt. If you’ve got the wiggle room in your budget, save up to pay for home improvements in cash, or use a revolving HELOC if you need some flexibility.

If a HELOC is unrealistic for you (either you don’t have enough equity in your home, or you don’t want to take on extra fees), consider using a 0% APR credit card to finance home repairs over a period of several months. With the Chase Freedom Unlimited®, you could qualify for up to 15 months of no-interest financing to cover the cost of your project (after, 14.99% to 23.74% variable APR)

And if you’ve just moved into a major fixer-upper, you may also want to look at a home improvement store card. Though store cards can have their drawbacks, such as low credit limits and high interest rates, homeowners with a laundry list of to-dos could benefit from the Lowe’s Advantage Credit Card, which offers an everyday 5% discount on eligible in-store and online purchases.

Information about the Lowe’s Advantage Credit Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the cards prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.