Even a modest home upgrade requires smart planning —and proper asset utilization— which should extend to how you'll pay for it.
-Cindy Hilty, Home Equity Lending Product Manager PNC Wealth Management®
You are likely to need a combination of ready cash and longer-term financing solutions to pay for expenditures as you complete the work. For example, the contractors and suppliers you choose to work with may require deposits before they begin, and are not likely to accept credit cards.
A sound financing plan will provide flexibility and peace of mind as you complete your project. Fans of home improvement shows will know that budget-altering mid-project discoveries such as outdated wiring or a structural challenge seem inevitable. “Anticipating problems — and how they could affect your funding choices — can help prevent them from becoming a major setback, saving you time and inconvenience,” Hilty says.
Assembling Sources of Funding
Consider the hypothetical case of homeowners Nina and Tom, who are preparing to add a first-floor master suite as part of their plan to remain in their home through retirement. Their budget is $150,000, based on several estimates for labor and materials. How will they create that pool of funds? Options may include:
- Draw on cash reserves. These homeowners have more than their renovation budget available in liquid investments. Paying cash can suit some homeowners who plan to remain in their homes long term and who have an aversion to debt, but Nina and Tom woud prefer to be more strategic.
- Sell some stocks in investment accounts. Shares that are showing gains can generate cash relatively quickly, but Nina and Tom aren't eager to throw off their portfolio strategy or trigger capital gains taxes, because they have held most of their positions longer than a year. Capital gains taxes can amount to as much as 20%, depending on their tax rate and net capital gains.
- Borrow against portfolios. Using certain securities in a portfolio as collateral is another option. "PNC's Quick Link Portfolio Line of Credit is a convenient solution that allows you to borrow against assets that are held at PNC in your investment or custody account," Hilty points out. "With little documentation required, the loan can be approved within 24 hours, so it's helpful when time is of the essence, as in a construction project." However, Nina and Tom must understand how a significant decrease in the value of their underlying assets could affect this form of credit.
- Refinance the mortgage or take out a home equity installment loan. Nina and Tom are familiar with using their home as collateral. They refinanced their home once before and know that this type of loan will provide a lump sum and a fixed repayment term (and possibly tax benefits on the interest they pay, in the case of the mortgage). They like knowing exactly what their monthly payments will be over time. “Since interest rates are expected to rise this year, locking into a fixed rate loan eliminates the worry that their monthly payment will increase down the road, especially if the homeowners plan to pay off the loan over a long period of time, say 10 years or longer,” notes Hilty.
- Obtain a home equity line of credit (HELOC). This revolving line of credit functions similar to a credit card, but is secured by a home as collateral. It's a variable-rate interest product, which might be worrisome in a rising rate environment unless the homeowners plan to pay the loan back in a short period of time. Nina and Tom like the idea that they could fine-tune their borrowing with a line of credit, using only the amount they need to pay for the renovation. And like their mortgage, the interest on a HELOC may offer tax benefits. "If the homeowners are sensitive to rising interest rates -as most are- they can still use the HELOC and lock in the rate on either a portion of their outstanding loan balance, or on the entire balance. It's a nice alternative that offers the flexibility of a line of credit with the ability to guard against rising interest rates by locking the rate on a selected balance," Hilty says.
One funding option Nina and Tom aren’t willing to consider is tapping their retirement accounts. Under specific circumstances, they could borrow from their 401(k) or IRA, but the rules are complex and penalties can be stiff. More importantly, Nina and Tom want to maximize the time their retirement investments spend in the market to give them the most opportunity for potential growth. Taking funds out runs counter to that goal.
How to choose?
The best funding option for your home improvements is one that is customized to your personal situation. It's often helpful to seek guidance from your PNC Wealth Management Banking Advisor who can tailor your borrowing solution based on your project, your assets, your long-term priorities and your personal credit preferences. Building the right funding package for your home renovations will take some effort, but just as with your home's upgrade, the results will be worth it.