The Surprising Way Most Homeowners Plan to Pay for Improvements in 2023

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KEY POINTS

  • Many homeowners intend to raid their bank accounts to cover renovations.
  • Even if you have the money, you may want to consider taking out a loan.
  • Personal loans, home equity loans, and HELOCs are all reasonable borrowing options to look at.

Would you go a similar route to spruce up your home?

Improving your home could enhance your quality of life in many ways. If there's a larger project on your radar, you may be eager to take the plunge.

Of course, before you dive into a home improvement project, you'll need to crunch the numbers to see what it will cost you. And you'll also need to make sure you have a way of paying for that project.

In a recent survey by Today's Homeowner, a surprising 60.3% of respondents said they plan to pay for home improvement projects using money from their checking or savings accounts. Of course, a lot of people don't have enough money in the bank to pull off a major renovation project. But if you do, you may be thinking of taking a withdrawal to cover your costs. That way, you won't have to deal with the hassle of applying for a loan, and you won't have to bear the cost of paying interest on one.

But even if you have the money sitting in your bank account to pay for a renovation, you may want to consider taking out a loan instead. Here's why.

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You don't want to leave yourself short for emergencies

If you have $40,000 in savings and need $5,000 to cover a home improvement project, then it could pay to take that withdrawal. But if you're looking at a $30,000 renovation, then raiding your savings may not be the best choice, even though doing so might seem to make sense.

One thing you don't want to do is leave yourself short on funds for emergency expenses just to cover a home renovation. So let's say you normally spend $6,000 a month on living costs. Ideally, you should have enough money saved in an emergency fund to cover at least three months of bills in case you lose your job. If you take a $30,000 withdrawal from $40,000 in savings, your balance will fall below that threshold, leaving you vulnerable in the event of a layoff.

Affordable ways to borrow for home renovations

If the idea of taking a large chunk of money out of your savings isn't sitting well with you, there are other options you can explore. One is a personal loan, which lets you borrow money for any purpose. If you have a strong credit score, this could be a good choice, and you may find you're able to lock in an affordable interest rate on a loan.

You could also tap the equity you have in your home with a home equity loan. This might be a better option than a personal loan if your credit score isn't in the best of shape.

Now, there's a third option to look at -- a home equity line of credit, or HELOC. A HELOC isn't a straight-up loan. Rather, you get access to a line of credit you can tap for many years.

You may be inclined to go this route if you're not sure what your upcoming renovation will cost you, as it gives you flexibility (whereas if you borrow $30,000 for a project that ends up costing $33,000, you'll be short). But HELOCs also come with variable interest rates, which means you run the risk of your payments getting more expensive over time.

If you're sitting on money in the bank, you might assume you should just take a withdrawal to pay for home improvements. In some cases, that makes sense. But if you're talking about removing a large chunk of your savings and leaving yourself with little money left over, then looking into different borrowing options may be the better choice.

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