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How much money can you afford to pump into your home?
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A lot of people are spending more time at home in the wake of the COVID-19 pandemic. While office life is certainly a thing again, many workers are continuing to do their jobs from home at least part of the week. And a lot of people who abandoned cramped city rentals in 2020 and bought suburban homes instead may not be in any rush to give up square footage and return to urban life.
All told, it’s easy to see why it’s so important to people to create a comfortable living space. And it’s also easy to see why homeowners may be willing to borrow money to finance home renovations.
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Angi’s most recent State of Home Spending report reveals that U.S. homeowners spent an average of $8,484 this year to fix up their properties. And if you’re thinking of spending a comparable amount of money, it may be more than worthwhile.
At the same time, you’ll need to proceed with caution if you’re going to take out a large loan to renovate your home. Doing so could create a financial crunch you don’t need right now.
Borrowing costs are high
A lot of people don’t have $8,484 sitting in a savings account to cover the cost of home improvements. And so if you’re looking at a big renovation project, you may be thinking about borrowing to cover its cost.
In that regard, you have options. You could borrow against the equity you have in your property, either via a home equity loan or line of credit (HELOC). Or, you could take out a personal loan.
But one thing you should know is that borrowing costs are up across the board right now. So even though home equity loans, HELOCs, and personal loans often come with competitive interest rates, right now, yours might cost extra due to the current borrowing environment.
You’ll need to be especially careful if you’re going to take out a HELOC to finance home improvements. Unlike personal and home equity loans, HELOCs come with variable interest. So bear in mind that the cost of borrowing via a HELOC has the potential to rise over time.
Crunch those numbers
You may be willing to make some sacrifices and cut back on certain types of spending to make a home renovation happen. But one thing you shouldn’t do is borrow more than you’re comfortable with to afford home improvements and get stuck with loan payments that just aren’t manageable.
If you’re nowhere close to being able to afford the type of renovation you want to move forward with, see if there’s a lower-cost compromise. You might want a better kitchen than your currently outdated one. If you can’t swing a complete remodel, start by replacing an appliance or two, as that could instantly make your life easier.
This is just one example. The point, however, is that there may be steps you can take to make modest improvements to your home if the big projects on your list just aren’t attainable right now.
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