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More Homeowners Pay for Repairs With Credit Cards


More Homeowners Pay for Repairs With Credit Cards

More Homeowners Pay for Repairs With Credit Cards

Chris Gash

Maybe those credit-card rewards—airline miles, concert tickets, a new laptop—are just too tempting.

A recent survey found that almost one-third of affluent homeowners, defined as those earning at least $100,000 a year, plan to use credit cards to pay for renovation projects, according to San Diego-based LightStream, the online lending division of SunTrust Banks. Of the 3,172 respondents in the January survey, 32% said they would pay with plastic, up from 26% in 2016.

For those able to pay off the bill in full when it arrives, using a credit card is not so bad. “They’re not going to maintain balances,” says Todd Nelson, LightStream’s business-development officer. “They just want the benefits of getting airline miles or other rewards.”

But for those who maintain a balance, paying by credit card doesn’t make sense, says Shomari D. Hearn, a certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla.

“It’s fine to tap savings or use a home-equity loan or line of credit, but I don’t think it’s a good idea to use credit cards for home improvements,” he says. “Interest rates on credit cards tend to be in the double digits, plus it’s personal debt and the interest is not tax-deductible.”

The residential remodeling market is booming these days, driven mainly by rising home prices, which enable homeowners to tap their equity. Real-estate data firm Black Knight Financial Services recently reported that annual home-price appreciation of 5.5% in 2016 helped raise the number of mortgage holders with tappable equity to 39.5 million.

According to the Joint Center for Housing Studies of Harvard University, spending on home improvements and repairs is forecast to grow 6.7% in 2017, reaching $317 billion. Older owners will account for the majority of that spending, with many investing in improvements that allow them to age in place. The center reported that expenditures by homeowners age 55 and over are slated to grow by nearly 33% by 2025.

With interest rates still low, financing an improvement may make sense. One option is a home-equity line of credit, or Heloc, says Ann Thompson, a senior vice president and divisional sales executive for Bank of America in San Francisco. The interest may be tax deductible, and there are no upfront fees on the Helocs.

In some cases, homeowners might consider a cash-out refinance, in which a borrower refinances for more than what is owed on the property and takes the difference in cash. “Sometimes, depending on what their first mortgage balance and rate are, as well as the scope of the improvements, it makes more sense to do a cash-out refinance, with a 15-, 20- or 30-year term,” Ms. Thompson says.

It takes about 45 days to close on a Heloc or cash-out refinance, Ms. Thompson says. The refinance also comes with an application fee, which starts at $475 at Bank of America, as well as additional processing fees and closing costs. Rates vary, she says, about the prime rate for the Heloc, which was 4% on April 24, and in the mid- to high-3% range for a refinance.

Separately, LightStream offers unsecured loans with interest rates that start at 4.29%, with no fees. These loans are based on the borrower’s creditworthiness, and the home isn’t used as collateral. Terms range from two to seven years, and lending decisions are made quickly—an advantage when money is needed to cover emergency repairs.

Jumbo Jungle Tips

Here are a few things to consider if you’re planning to make improvements to your home:

• Consider cash. “Paying with savings is the most sensible approach if someone has the cash on hand,” says Brad Hunter, chief economist of HomeAdvisor, an online home-improvement marketplace in Golden, Colo. “A lot of wealthy people borrow when they don’t have to.” But depleting cash reserves means you can’t invest those funds and lose out on possible tax deductions on home-loan interest.

• Talk to a real-estate agent. If you’re thinking of selling your home within a few years, make sure you’re doing improvements that will make your home attractive to potential buyers—and not over-improving. A real-estate agent can help you determine the return on investment of your project.

• Stick to a budget. It’s common for costs to rise once a project begins, as homeowners add additional, more costly options. By preparing a budget ahead of time, after getting multiple bids, you’ll avoid overspending.

 

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