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Home Improvement Financing


nolanryan
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I have always preferred a home equity line of credit (heloc) as the financing vehicle for substantive home improvements.  Assuming you intend to repay the cost over more than a year, it's one of the lowest cost options.  And our heloc's have always had the option to convert a portion of the outstanding line to a fixed rate term loan, permitting us to fix the cost (if we wish) and not be subject to rate changes.

 

Because such improvements should result in increased home value (not necessarily $ for $), I've found it a very reasonable finance option.  By contrast, I generally believe it's a poor choice to use equity financing for non-home related expenditures (such as a child's braces, etc.)

 

Most lenders will extend a total HELOC line such that the amount + outstanding mortgage debt doesn't exceed 80% of the current home appraisal.  (Some will go to 90% or even 100%, but such lenders have thinned out since the 2008 recession.)  Most lenders can make your credit line available to you within days of getting an appraisal (many will pay for the appraisal, so up front costs to you are nominal).

 

Your rate will depend on your credit, but for 720+ a rate of Prime - 0.25% (3% currently) is widely available.

 

Most HELOCs are set up with a 10 year draw period, during which a typical monthly payment requirement is 1% of the balance (you can always pay more), making it a very flexible loan product.  At the end of 10 years, the balance is converted to a 20-year term loan.  Since we typically borrow with intended payback of 3 to 5 years, or draw for improvements before putting our home on the market, we've never hit the 10-year conversion point.

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How long do you plan to take to pay it off?

 

I'd try to put as much as possible on new rewards cards with SUBs, then after that I'd put as much on existing rewards cards, and then if I needed to carry a portion of the balance I'd take one of the numerous 0% APR BT offers that have been landing in my mailbox every single week for the past couple of months.

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As @cv91915 implies, there's no finance choice that's optimal under all circumstances.

 

To his point, my contractor just laid down a hardwood floor for which it was best for me to just choose the material and pay for it.  I opted for Barclays Arrival, w/ 2% rewards (when used to offset travel purchases), which also has a temporary 7 mo 0% APR offer.  Perfect for my needs.

 

Of course, for the bulk of the work for us, the contractor purchases his own materials and passes on the cost.  Credit is either not an option, or if it were, it would likely be with a credit card surcharge that may diminish much of any credit card SUB/rewards (my pool maintenance guy charges 3.5% for any equipment purchase paid by credit card).  Still, on a large SUB (e.g. Sapphire Reserve $1000/$1250/$1500 on $4000 in purchases) there's plenty of room to absorb such a surcharge.

 

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19 hours ago, cv91915 said:

How long do you plan to take to pay it off?

 

I'd try to put as much as possible on new rewards cards with SUBs, then after that I'd put as much on existing rewards cards, and then if I needed to carry a portion of the balance I'd take one of the numerous 0% APR BT offers that have been landing in my mailbox every single week for the past couple of months.

ten months is the goal based on a budget and adding in some fluff.

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9 hours ago, nolanryan said:

ten months is the goal based on a budget and adding in some fluff.

 

I'd call that more of a "float" of your expenses than financing them.  Playing with semantics a bit here, of course, but (as per my post preface, "Assuming you intend to repay the cost over more than a year") a HELOC as an initial funding source for purchases isn't favored as an initial payment source for purchases relative to purchases on new cards with attractive SUBs.

 

On the other hand, where you won't be purchasing materials yourself, and where expense involves payments to contractors, a HELOC remains an attractive option when a credit card payment isn't an option, inasmuch as draws don't incur a transaction fee.

 

Still, even where a cash payment is required to settle an expense, Plastiq is a payment option worth considering.  It potentially will allow you to charge a check payment to your vendor, earning credit card rewards.  While the 3%+ fee will wipe out standard credit card rewards, if the payments permit you to earn SUB's amounting to as much as 20% of your payments, then it's a great option.

 

Of course, after putting the charge on your new credit card to earn a sizable SUB, you're still going to need to move it somewhere to avoid likely significant interest until paid off.  Taking advantage of another credit card with a 0% bt offer is an option.  But these typically feature a 3% up front transfer fee, which could effectively work out to a 6% to 10% APR, depending upon your repayment schedule.  So, here again, a HELOC may prove advantageous.  With a typical interest rate of 3% or 3-1/4% (at present), computed against your monthly balance, you actual interest expense could be significantly lower than the 3% credit card transfer fee, when you consider the potential for periodic partial repayment of the balance, and an intended full payoff in under a year's time.

 

One last push on the HELOC front:  Even under the best of circumstances, plans are often thwarted.  A HELOC offers a comfortable backstop in the event that your budget for repayment goes by the wayside and you need to extend financing over a longer period than intended.  While the interest rate on a HELOC will fluctuate with the prime rate, over the short to medium haul, that rate tends to be relatively stable.

 

On the other hand, financing your costs through 0% balance transfers is much more of a balancing act.  Depending upon the limits you're assigned, it may not be practical to finance your expenses with just one card.  Unless you can afford a moderate hit to your score for an extended period, it's best to use no more than 30% of your limit on any one card (you can push to 50% and likely only suffer around a 20-30 pt hit vs staying at 30%).  If you need to extend beyond your promotional 0% rate term, you leave yourself at some risk that you won't secure a new 0% credit card source (and, in any case, are likely to be out another 3% up front fee, for what it's worth).

 

The best option likely depends upon your risk tolerance and how much you want to fuss with the balance.  That said, if you have 40% or more equity in your home (relative to current market appraisal), a HELOC is a great security blanket, even when you don't have an immediate need for funds.

 

Edited by hdporter
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17 hours ago, nolanryan said:

ten months is the goal based on a budget and adding in some fluff.

 

There are multiple rewards card offers with 0% on new purchases for 15-18 months, and a SUB (Chase Freedom Unlimited, Amex BCE, Citi Rewards+, and others).

 

Pick up a few of those, get 1-1.5% back or more, plus SUBs, and then pay no interest for over a year.

 

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