This month we're answering questions submitted by you on financing or paying for home renovations.
Here from Bank of Hawaii is Vice President Reid Hinaga.
We received an interesting question from Buyuan, who asks "What is a safe way to pay for home renovations?"
When you decide to renovate, one of the most important questions to consider from the start is how will you pay for it? And, like Buyuan mentions, what is the safest and best way to pay? One thing to keep in mind is that there are a lot of scams out there perpetrated by contractors who con people into giving them money and then they don't show up, don't finish the job or they do shoddy work. Always have a contract. Some contracts are based on work completed, so you'll pay as you go along. So, make sure you don't give too much money up front. And always verify if the contractor is licensed and reputable.
Now "safe" could mean different things. On the other end, what could be a safe or conservative way to finance your home renovation?
Reid: If they've saved up enough cash to pay for the project, paying cash would be the safest. They won't need to worry about finance charges, interest rates, or even using their home as collateral to pay back a loan. The risk is much less. But one of the drawbacks to paying cash is that the money spent could be earning interest in an investment. Financing your project and putting the cash you have into a higher-return investment may cost less in the long run.
If it's a small project, like painting your walls or re-carpeting your place, will using a credit card be considered too risky?
It does have its own risks because credit card interest rates can be quite high and if you don't pay off your entire balance, it may cost you much more than you expected. But, if you know for sure that you can pay off the entire balance with no interest, while gaining points or rewards—it may work to your advantage. Plus, credit cards do offer some protection like returning or replacing damaged merchandise at no additional cost.
On the other side, I understand most home renovation projects can cost quite a lot. So what can people do to finance the big projects?
There are a lot of financing options. There are home equity loans where you borrow against the value of your home, minus the amount of their existing mortgage; home equity line of credit, which is like a revolving line of credit; cash-out refinancing which may work for you if you have owned your home for a while; and even Title 1 loans which are insured by the federal government.
Any last tips?
A lot of people aren't aware of the financing options available to them. Since every situation is different, it's always best to first consult a financial advisor or loan officer.
After carefully considering your options, be sure to know what you're committing to before signing anything. And always verify if your selected contractor is licensed and reputable.