What Every Homeowner Should Know About Money Management
If you are like many other homeowners, your house is the single most expensive thing you own. For that reason alone, it's essential to know how to take care of it, make it comfortable, and prepare it for sale should you ever decide to move. And, as every homeowner knows, it takes money to do anything to a house. The list of upgrades, improvements, and cosmetic jobs is virtually endless.
Most people know what they want to do, but often are not sure about where the money will come from. That's where money management comes in. Every project has its price tag, but it's up to you to decide the smartest way to pay the bill. Here are five things you need to know if you own a home and plan to improve it in any way, for whatever reason.
Avoid Using Credit Cards
Unfortunately, some turn to credit cards for home-related repair funding, which almost never makes sense. Unless the bill is under $1,000 and you have a card with a super-low rate, there's nearly always a smarter financial resource. If you find yourself even thinking about using credit cards for home repairs or improvements, be certain to explore every other option first.
HELOCs are Versatile and Fast Resources
Taking out a home equity line of credit, or HELOC, is usually your best bet for home improvements of all kinds. In order to find options that fit your budget, shop around for rates and favorable conditions. For example, you'll usually get lower interest rates with shorter repayment periods. Plus, the better your credit scores, the lower your rates in most cases. Of course, much depends on the amount of equity you already have in your home. To learn the ins and outs of HELOCs, review an online guide to the best HELOC lenders.
Do Not Raid the IRA
There are a couple exceptions to the ‘don't raid your IRA’ rule. For instance, the IRS allows some homeowners to take out IRA money, penalty-free to repair storm damage. But, unless you are facing a true hardship, resorting to an IRA will cost you greatly. In addition to a flat 10 percent penalty on the amount withdrawn if you're not yet retired, you'll pay ordinary income tax as well. Bottom line is that in most cases, you should not touch IRA money to pay for any home improvement project.
Do Not Deplete Savings Accounts
Maybe you feel lucky to have enough savings to cover a big project. That's a wonderful thing, and demonstrates your long-term financial savvy. But think twice before depleting savings accounts for repair or improvement projects. Before you explore the option of using current savings consider pushing the project timeline and gain control of your spending to create additional savings to allocate towards improving your home.
Look closely at what your savings is earning. If it's parked in a high-interest brokerage or CD, chances are you have wiser ways to pay for the project. For many homeowners, it makes sense to use savings to cover only a portion of the bills, and turning to something like a HELOC for the rest of the money, or simply down-sizing the scope of the improvement.