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Ready to Upgrade Your Home? Here’s How to Finance a Home Renovation

More often than not, when people talk about home renovation, they actually talk about building their dream house. But that’s not the only reason property owners want home improvement projects. 

Some want to turn their homes into a money-making asset, such as a rental property, whether for long-term residents or Airbnb bookers. Others want to add rooms and kid-friendly features to accommodate their growing family. Moreover, you’ll always find people who will remodel their properties before selling them so that they’ll fetch a higher price.

Regardless of your plans, the biggest question that you’ll need to ask is how you’re going to pay for it. Pinning this down early on will keep you from making costly mistakes in the future. 

Thankfully, there are a few practical ways to finance a home renovation. We’ve listed them down below, plus a few handy tips on how to save on renovation costs while maximizing your budget.

Ways to Finance a Home Renovation in the Philippines

The method of paying for your home improvement project will depend on two things: the amount of money that you have or are willing to borrow and the size of the property to be renovated. Throughout the project, all your decisions should be guided by these two variables.  

In the Philippines, there are five ways to finance your home renovation project aside from a regular housing loan. Each one caters to different needs and has its pros and cons. Let’s take a closer look to determine which one suits you best.

Save Up and Pay Cash

Perhaps, the most logical way to pay for your home improvement project is to save up for it. But keep in mind that you have to have a separate savings account for this. We don’t recommend keeping the renovation money in your emergency fund, as you may end up spending the emergency fund as well.

Advantages of Paying in Cash

• No financial obligations to worry about – Of course, the biggest benefit of this mode of payment is that you don’t have to ink any loan contract with any lending party. You won’t owe anyone money. 
• No need to cover interest and related fees – When you pay back your loans, you’re also paying the interest. And if your payments are delayed, you’ll find yourself covering the penalties as well. With cash payments, you won’t have to worry about these things.

Disadvantages of Paying in Cash

• Will require you to work harder for it – Saving money for renovation can be tricky when you have only one source of income. To save money fast, you’ll have to to moonlight for another employer or start a gig or small business that earns passive income.
• Finishing the project may take time – Building a large reserve of cash for renovation money may take months, and even years. This is a reality that you’ll have to face if you’re really adamant about not applying for a housing loan.
• May interfere with the way you save: In your bid to bootstrap your home renovation, you’ll affect your existing savings in two ways. First, growing your emergency fund or other savings accounts will be delayed since you put a large chunk of your earnings towards the project. Second, you may be forced to tap into your existing savings in case your renovation funds run out.

Reasons to Choose Paying in Cash

Using cash to pay for home renovation is ideal under these circumstances:  

• You and your partner have the ability to pool a large amount of cash (e.g. you both have high-paying jobs, profitable businesses, etc.).
• You’re not in a hurry to start the project.
• You have no debts (or all your debts are under control) and you want to keep it that way.

Personal Loans for Home Improvement

A personal loan for home improvement is no different from any unsecured loan used for other purposes like business and travel. You can apply for personal loans at banks or government institutions.

For government loans, among the most reliable are the SSS and Pag-IBIG loans.

When it comes to bank loans for home renovation, Citibank’s Personal Loan is an ideal choice, as its monthly interest rate of 1.26% is one of the lowest in the market. The bank also offers the longest loan term of up to five years (60 months). Moreover, the processing fees are considerably lower than what the other banks are offering.

Advantages of Personal Home Improvement Loans

• No collateral needed – Borrowers can qualify for a personal loan even without high home equity (the difference between your property’s market value and the outstanding balance on your existing home loan).
• Easier and cheaper application – Unlike home equity loans, personal loans don’t require appraisals and other services (which come with fees) to secure an approval.
• Fixed interest rate – A single interest rate, which is determined based on the borrower’s credit history, applies throughout the loan term. This means monthly payments are predictable and can be easily budgeted.
• Lower interest payments over time – Repayment periods for personal loans in the Philippines are shorter than other types of home improvement loans, typically lasting for one year to five years. Because of this, you can quickly pay back the loan and save on interest payments compared to repaying a home loan with a longer term of 10 to 25 years.
• Smaller loan amounts – You can borrow an amount as low as PHP 10,000. This is great if you need money only for minor house repairs or upgrades.

Disadvantages of Personal Home Improvement Loans

• Higher interest rates – Compared to other types of home loans, personal loans used for home improvements (and even for other expenses) come with higher rates per annum.
• Faster loan repayments – Because personal loans have shorter terms than home loans, monthly amortizations may be difficult on the budget, especially if you’re working on a costly home renovation project.

Reasons to Choose a Personal Loan for Home Improvement

A personal loan makes a perfect choice if you have the following:

• Small, minor home improvement projects
• Good credit score
• Not enough home equity
• Fixed monthly budget

Home Equity Loans

Through a home equity loan, you can borrow against the market value of your existing home and use the money for renovation. It’s a second mortgage you’ll be paying on a fixed price per month over a number of years, similar to the original mortgage on your home loan.

Banks offer home equity loans. But if you’re looking to borrow from a government agency, go for Pag-IBIG’s Home Equity Appreciation Loan (HEAL).

Advantages of Home Equity Loans

• Higher chance of approval for large loan amounts – With a home equity loan, you’re using your home as collateral, which makes it a secured type of loan. Lenders are more likely to approve larger amounts for secured loans, especially if there’s huge equity in the home.
• Lower interest rates than personal loans – Another advantage that comes with secured loans such as a home equity loan is getting lower rates than those of personal loans.

Disadvantages of Home Equity Loans

• Risk of foreclosure – Failure to repay your loan will cause the bank to seize your property.^[1]
• Home equity as the basis for loan approval – The lender’s decision is largely based on your home’s market value. So if you don’t have enough home equity, you’ll find it hard to qualify for this type of home improvement loan.
• Long-term repayments – This is a drawback if you’re using a home equity loan for an inexpensive and minor home repair. You’ll be paying monthly mortgage and interest for up to 25 years.

Reasons to Choose a Home Equity Loan

Getting a home equity loan is ideal under these circumstances:

• Significant home equity
• Expensive and long-term home renovation

Home Loan Refinancing

Other than a house renovation loan, you may also source funds for renovating your home through refinancing. This type of housing loan involves replacing an existing loan with a new mortgage, with a new interest rate, outstanding balance, monthly installments, and repayment term. You can use the extra money from your refinanced home loan for your home improvement project.

Advantages of Home Loan Refinancing

• Lower monthly payments – Refinancing is meant to make loan repayments easier to manage.
• Lower interest rates – Paying lower rates is one of the most common reasons borrowers decide to refinance their home loans.
• Cashing out your home equity – When you refinance your home loan, you’ll have access to money equivalent to the difference between your home’s market value and the unpaid balance on your home loan. You can use this amount for your home improvement project.
• Finish off your loan early – If you move your existing loan from a 30-year term to a 20-year or 15-year term, you’ll finish paying off your loan earlier than expected. This means that your interest payments will also be cut short. 

Disadvantages of Home Loan Refinancing

• No guarantee of approval – Having an existing home loan doesn’t automatically mean you’ll get approved for a new loan. Lenders will still have to evaluate your credit score and credit history to determine your creditworthiness.
• More expensive than other home improvement loan types – A new home loan means you’re paying interest with your new monthly mortgage rather than lowering your outstanding balance. Similarly, moving your loan from a longer term to a shorter term will require you to make higher monthly mortgage payments. 

Reasons to Choose a Home Loan Refinancing

Home loan refinancing will only make an ideal choice if you have the following:

• Significant home equity
• Good credit score and history
• Plan to finish the home loan as early as possible

Read more: Home Renovation 101: How to Renovate Your Home on a Budget

Credit Cards

You may not realize it, but credit cards are one of the ways to finance your home renovation. This method is a good choice if you only have a small-scale remodeling project, such as upgrading your kitchen, buying new appliances, or expanding your kid’s bedroom.  

Advantages of Credit Cards

• Readily available – You don’t have to fill out application forms and collate documentary requirements to get the money that you need. All you need to do is just swipe your card to buy the materials for the project.
• May have 0% interest offers – From time to time, some credit cards have 0% interest offers with select partner home improvement stores and merchants. Keep an eye out for these deals so you can save big!  
• May earn you rewards – Shop at your card’s partner home improvement store and you may earn different types of rewards, such as cashbacks, rebates, discounts, and points.  

Disadvantages of Credit Cards

• Higher interest rates – Depending on your credit card, the interest rate may be higher than other types of personal or home loans.
• Difficulty with paying your contractor ­– If you’re bringing in a contractor for the project, they may not be able to accept payments via credit card.
• Hard to use if you have a low credit limit ­– In the grand scheme of your home improvement project, a card with a low credit limit can only offer so much. Likewise, a high credit limit with a high utilization rate may not afford you the things that you need for the renovation. For the latter, you have to pay off your balance first to refresh your credit limit and eventually use it. 

Reasons to Choose a Credit Card Payment Mode

Funding your home renovation using a credit card is only a good choice if you satisfy the following:

• You want to boost your credit score.
• Your remodeling project is just small.
• You still have a high credit limit and have the ability to pay off your balance.

Read more: Get a Home Makeover for Under PHP 5,000

Tips on Choosing the Best Home Renovation Loan

Finding the best loan for home improvement doesn’t just involve looking for ones with the lowest interest rates. There are other things you also have to consider.

Keep these quick tips in mind to make it easier for you to choose the home improvement loan that fits your needs:

• Ask for recommendations and feedback from relatives and friends who have done home improvement projects.
• Make sure you’re borrowing for the right reasons. Do you really need that kitchen makeover? Will a larger kitchen help you earn more money later?
• Compute how much you realistically need and can afford. You don’t want to risk losing your property in the future due to foreclosure.
• Work on improving your credit score. A good credit score raises your chance of getting better interest rates and deals on loans.
• Get a personal loan for minor, short-term home repairs.
• Get a home equity loan for more expensive, longer-term home improvements.
• Compare loans. Whether you’re looking for a personal loan or housing loan to meet your home renovation needs, you can easily make comparisons between loans through Moneymax.

Tips on Saving on Home Renovation Costs

Now that you have the funds, whether bootstrapped or borrowed, the next thing that you’ll need to do is to maximize every cent. You can do that through money-saving methods that still ensure high-quality work. Here are the things that you need to do.

1. Stick to Your Budget

Home improvements are akin to grocery shopping; to avoid unnecessary expenses, you’ve got to stay within your budget. So, before you go out and shop, you must already have a definitive list of materials needed.

2. Do Things Yourself

You can save money by taking on some small or doable renovation tasks, such as interior decoration and recycling old furniture pieces. However, tasks that you don’t have knowledge of should be left to the professionals. These include installing electrical wiring, tiling, painting, and roofing, among others.

3. Wait for Sales and Big Discounts

Appliance and home improvement shops offer big sales and discounts from time to time. Subscribe to their newsletters or social media alerts to be notified of their promos.

4. Plan with Professionals

Some homeowners forego the services of architects and engineers, thinking that they’re just an added expense. However, your plan needs the approval and validation of such professionals to make sure that your home will be safe. If the structural integrity of your renovated home fails in the end, you’ll find yourself shelling out more money. Save money and save lives by getting professionals onboard. 

5. Go for High-Quality and Trusted Service

When it comes to home renovation, quality is everything. And it usually comes with a price. Never ever skimp on this part. Otherwise, you’ll end up spending more than you’ve planned. You don’t want do-overs to happen due to low-quality work, so be willing to spend on high-quality services from the get-go.  

Read more: 7 Stylish and Affordable Home Makeover Ideas

Final Thoughts

Home improvement these days has become much easier because there are already various ways to finance a home renovation project. Choosing one, however, should always be hinged on reality, which is embodied by these two factors: project size and budget.

To avoid big mistakes, don’t rush your decision. Study all the pros and cons of each funding option. To gauge the feasibility of your project, it pays to seek the advice of the professionals.

Source: ^[1] What is Foreclosure?

Moneymax

With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.