What's the Best Way to Finance for Home Repairs? Cash vs. Equity

Ways to Finance Your Home Improvements

Cash
This is the simplest way. Paying for home improvements out of pocket instead of borrowing could save you money in terms of accrued interest in the long run. On the other hand, putting your own money into improvements will decrease your available cash on hand for emergencies.

Equity
An alternative to using cash is tapping into the available equity in your home. Even with interest rates higher than they were in the middle of the pandemic, a cash-out refinance can likely still save you money in the long run, depending on how long you’ve owned your home, your future plans for it, and how you intend to invest the money from equity.

Should You Use Equity or Pay Cash for Financing Home Improvements?

Pros and Cons of Paying Cash
One of the cheapest ways to pay for renovations is to use cash or personal savings because you aren't taking on any more debt that will accrue interest over time. However, the mistake many homeowners make is paying too much out of pocket and overextending their budget. It's always important to keep some cash on hand or in reserves to cover unexpected expenses that life might throw your way.

Learning how to build equity with your home improvements is great, but there is an opportunity cost to consider. Sometimes investing your cash elsewhere might earn a higher return on investment (as long as you account for the cost to finance your home improvements into your global rate of return). For example, the average stock market return has been around 9.2% over the past ten years, according to Goldman Sachs.

Pros and Cons of Paying with Equity
If you don't want to use up all your available cash, leveraging the accessible equity in your home could be a wise choice if you take advantage of the current interest rate environment.

Although mortgage rates have inched back up, they still may be lower than when you originally financed your home. Especially depending on how long ago you purchased and how much equity you’ve built in your home, using debt to finance home renovations may be your cheaper option.

Similarly, recent data indicates that, on average, homeowners gained roughly $33,400 of equity in the first quarter of 2021. This is one of the highest annual gains per borrower in the last ten years, meaning you might have access to additional access funds for financing home improvements.

How to Build Equity with Home Improvements

Reinvesting equity into our home can be easy if you focus on home renovation projects with a higher investment return.

While many people might focus on refinishing interior spaces, data has found that five of the six top home improvement projects for 2021 with the highest return on investment were exterior renovations. For example, by replacing a garage door or installing stone veneer siding on the entryway or lower front-facing exterior, you could recoup over 90% of your investment.

Financing for home improvements, such as installing new windows or an entryway door, will also give you a lot of bang for your buck. In addition, projects can help enhance your home's curb appeal, making it more attractive to potential buyers.

Focusing on the kitchen can be ideal if you intend to do interior renovations. The cost of a minor kitchen remodel can vary depending on what you are upgrading or changing, but on average, expect to pay around $25,000 for a complete kitchen renovation.

Surprisingly, projects with the worst return on investment include adding another bathroom or addition to your main suite, but this might add considerable value to your daily life inside your home.

Financing for Home Improvements with Cake

Having cash on hand for an emergency or in your investment account can often yield a better return than merely sitting on your home's equity. With everyone spending more time at home, having rates near all-time lows and home values at an all-time high, there's never been a better time to learn how to build home equity with home improvements.