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Springtime home renovations: Worth taking on debt?

By Brian O'Connell/MainStreet.com

It's springtime, and besides welcoming back baseball and backyard bumblebees, homeowners are dusting off plans made this winter to renovate their homes. Research from LightStream, the online lending division of SunTrust Bank, shows 57 percent of U.S. homeowners plan to spend money on home improvement this year.

No problem there, but 30 percent also plan to use credit cards to pay for the upgrade, up from 9 percent last year. LightStream also reports an uptick in renovation consumers who will seek a home loan to pay for an upgrade.

Is borrowing a good way to pay for home renovations? SunTrust certainly thinks so.

"With the economy improving, more and more homeowners are deciding to move forward on remodeling projects," says Todd Nelson, business development officer at LightStream. "Taking the time to consider various financing options such as a home equity loan or personal loan can help make their investments go even further, particularly with today's low interest rates. For people without equity to leverage, an unsecured home improvement loan can be a great solution."

But even SunTrust, which wants consumers to take out a home renovation loan, notes that 35 percent of homeowners "do not have sufficient equity in their homes to leverage."

That's why homeowners should proceed with caution when financing a home renovation project, especially as they grow more expensive, says Dave Seymour, co-host of A&E's Flipping Boston.

"I would never recommend being 'house poor' with the most fabulous kitchen on the block," Seymour says. "Business fundamentals should be deployed even in the emotional arena of one's own home. Shop the rates that are available and use a professional to put the loan package together. Full transparency should be paramount."

Jason McCoy, a voice-over talent service provider near Baltimore, says he took a "tiered" approach to financing his home renovation. "The best way to save money is to look into being your own general contractor," he says. "But when my wife and I renovate, we create tiers to help us decide how to finance a home renovation project. If the project is income producing, like finishing off a room over the garage to rent out or installing solar panels to eliminate our electric bill, we'll get a loan." McCoy says he'll also use a credit card with a zero-percent rate that he and his wife can pay off within a year. If that isn't an option, he'll use a home equity loan through a credit union. "But if the project doesn't provide a savings or produce income, we save up and pay cash."

Uncle Sam can offer some help. Lauren Bowling, an Atlanta personal finance blogger and founder of Lbeeandthemoneytree.com, says she has used special government loans to finance her home renovations. "I used a 203(k) renovation loan to renovate my house in southwest Atlanta," she says. "When renovation charges exceeded the loan amount, I raided my savings and took on a no-interest loan from my parents."

When it comes to financing a home upgrade, size really does matter. If it's a small, do-it-yourself project that takes you down to Home Depot, go ahead and use a credit card, says Jessica Botkin, a real estate agent in Fairborn, Ohio. The farther up the project scale you go, you'll likely need a HELOC or a loan from a bank or family member. Haggling over price can help save.

"When dealing with contractors to negotiate the best price, Angie's List is a great place to start," Botkin advises. "You'll get information from other real folks on the best bang for your buck."

Botkin says it's best to choose three contractors and have estimates done by your top picks. "Offer to pay cash if you can -- that can knock a $2,000 job down to $1,700," she says.

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