Key points

  • Financing home renovations could prove expensive in today’s borrowing environment.
  • Waiting another year might mean snagging a lower interest rate on a personal loan, home equity loan, or HELOC.

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Now that spring is officially in the air, a lot of people might have home improvements on their radar. And if you have the money sitting in your savings account to move forward with a big renovation, then you may be eager to dive in.

But many people can’t afford home renovations outright. Rather, they need to borrow money to cover their costs, whether by taking out a personal loan or borrowing against their home equity.

The problem with that, though, is that borrowing has gotten expensive across the board. So if you take out a personal loan, home equity loan, or HELOC today, you might get stuck with an interest rate you’re not happy with.

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It’s a bad time to borrow money

The Federal Reserve really wants inflation levels to drop. To that end, it implemented nine consecutive interest rate hikes at its last string of meetings.

How do interest rates hike help with inflation? Interest rate hikes can drive consumers to curb their spending for two reasons. First, when it becomes more expensive to borrow money, doing so becomes less appealing. Second, interest rate hikes tend to lead to higher interest rates in savings accounts. And when that happens, consumers are more motivated to save their money than to spend it.

Meanwhile, rampant inflation tends to arise when the demand for consumer goods and services exceeds the available supply. So if consumer spending declines, it should narrow that gap between supply and demand and allow inflation levels to drop.

To be clear, the Fed isn’t trying to hurt consumers by hiking up interest rates. If anything, it’s trying to help consumers by bringing inflation down to a more tolerable level. But because the Fed has raised interest rates so many times over the past year and changed, it’s a very expensive time to borrow money for just about any purpose. So if you’re able to put off your home renovations, you may want to do so. Holding off on taking out a loan could allow you to lock one in at a far more affordable rate down the line.

What if your renovations can’t wait?

You may have a pressing need to renovate your home. You might, for example, be putting on an addition so an aging relative can come live with you, and that’s the sort of thing you may not want to wait on.

If that’s the case, take your time to compare your borrowing options so you end up with the most affordable loan you qualify for. That could mean shopping around with different personal loans and home equity loan lenders to see what rates are on offer.

You may also be tempted to take out a HELOC if you’re not sure exactly how much money you need to borrow for renovations and want more flexibility. A HELOC might be helpful in the context of taking on a large home project, but these lines of credit tend to come with variable interest rates. That means you risk facing more expensive payments over time.

Both personal and home equity loans come with interest rates that are fixed. So while you’re locked into a specific loan amount, you also don’t have to worry about your payments climbing down the line. And at the time when you’re starting out with a higher interest rate, that’s an important thing.

By Chiki