The 6 Dumbest Things Homeowners Do When Paying for a Renovation

You’ll have a lot of decisions to make during your home renovation—how to pay for it is probably the biggest. That’s because making an investment in a home you love right now shouldn’t end up costing you for years to come. But too often homeowners make really bad choices when it comes to financing their project, and that’s exactly what happens.

Here are 6 of the dumbest things homeowners do when paying for a renovation:

1. Drain Their Emergency Savings

It’s hard to enjoy that brand new master bedroom or kitchen when you can’t stop stressing about the huge hole it left in your bank account. Your thoughtfully planned renovation project is definitely not an emergency, so you shouldn’t use those savings to pay for it. Plus, if any unforeseen issues arise during construction, and you have nothing to fall back on… just don’t put yourself in that position.

2. Use a High-Interest Rate, Unsecured Personal Loan or Credit Card

A great choice for your bank, but not for you. If high-interest and unsecured aren’t red flags enough, let us explain. The higher interest rates—we’re talking best case 10% (according to LendingTree)—and shorter terms of a personal loan mean unnecessarily high monthly payments. Or if you use a credit card and choose to pay back the minimum each month to avoid interest rates around 18.2% on average (reported by WalletHub), you’ll never be debt-free. The result of both of these options is the death of your cash flow—without even a tax benefit. We’ll pass.

3. Borrow From Their 401k

While this isn’t the worst option on the list, why would you ever want to take from your own retirement? What’s worse is that repayment will actually cost you more than your original contributions since you’re paying back borrowed pre-tax funds with after-tax money. And due to the surprisingly large principal of these loans, it’s unlikely to pay it back quickly, no matter how optimistic you are. Let’s face it, no one actually likes borrowing money, but if you have to, borrowing from your retirement fund may not be the best choice.

4. Refinance Their House into a Higher Rate

There’s that higher rate again. When you choose to take cash out of your homes, it’ll probably end up costing you. Just about 60% of cash-out refinancings in 2018 came with higher interest rates—the biggest share since before the financial crisis—according to Black Knight Inc. Just think about it. When you’ve already spent however many years paying into a loan, why would you want to end up back at square one?

5. Use a Construction Loan Unnecessarily

Even your contractor hates construction loans—they might even flat out refuse to use one. These loans require a lot of extra paperwork and multiple inspections, and the bank withholds a nice chunk of your money throughout the project. None of this is ideal for either of you. But what’s worse is that they also require you to refinance your first mortgage (refer to disadvantages in #4) and hit you with tons of additional fees. Many of these loans will also take you from a fixed rate to an adjustable-rate mortgage during the process, which means your rates can rise even more over time.

Instead, renovation home equity loans, like a RenoFi Loan, have no inspections, no major delays, no required refinancing. You’re in control of the distribution of the funds, so there are fewer unwanted surprises and costs along the way.

6. Borrow Money From Their Family

A good rule of thumb: don’t borrow money from anyone you need to see at Thanksgiving. Family and finances are usually never a good mix, so if you like your relatives, don’t risk it.

Smarter Ways to Pay for Your Renovation

So what is the smart way to pay for your renovation? Well, if the option allows, cash is always king. But for most homeowners—like younger families or those who just used a lot of their cash on a down payment, financing can be a great option if you do it the right way.

If you have the equity, you’re looking at two solid options: Home Equity Loans or a Cashout Refi—both of which offer higher borrowing power at the lowest low rates. Or if you’re light on equity, a RenoFi Loan is the perfect solution. RenoFi Home Renovation Loans factor in what your home will be worth after the renovation. This allows you to borrow more so you can tackle your entire renovation wishlist. Contact our team today to learn more.

Find a Lender

 

Other information you may be interested in...

  • 3 Reasons You Shouldn’t Use a Cashout Refinance When Renovating - Refinancing can often be a dumb way to pay for your renovations. If you’re trying to lock in a significantly lower rate, you may be an exception, but for most homeowners, refinancing means throwing money away and getting less out of it. Let us explain. Here are 3 reasons why you shouldn’t use a Cashout Refinance when renovating.
  • What if My Contractor Refuses to Work with a Construction Loan? - Did you know contractors actually hate construction loans? Since these loans will typically cost your contractor more time and money, it’s hard to blame them. But when your contractor actually refuses to work with a construction loan completely, then what do you do?
  • Why Contractors HATE Construction Loans - You finally found a contractor, and you’ve started looking for a construction loan. Hold up! There’s something you should know: contractors HATE construction loans.
  • 4 Simple Steps to Your Renovation with RenoFi - At RenoFi we break the renovation financing process into 4 simple steps that will walk you through the initial phase of getting your renovation off the ground. Here is what you need to know...
  • Introducing RenoFi Renovation Loans - RenoFi was started in early 2018 because of the belief that we could make a difference in millions of homeowners’ lives by empowering them to transform their homes into spaces they love with a smart and affordable financing solution. Today we are announcing that we raised our Series A of $6.4M.
  • Other posts about Loans
  • Other posts about Renovations