Can I Finance A Paint Job?
One of the most common questions we get when people are ready to paint their homes is “Can I finance a paint job”?
Absolutely, you can! In this article we will discuss the ins and outs and different types of financing options you can utilize on a paint project or other home improvement project and why it can be a great idea that offers tons of flexibility.
Always reach out to your preferred lender regarding loan terms and options and be sure to ask your contractor what options they may have available to you.
What options are available to finance a paint project?
There are many ways to finance a paint project. Most paint projects or small construction projects would fall under utilizing one of the following options- a HELOC loan, a fixed amount home equity loan from your bank, or you could work with your paint contractor if they have in house or third party financing options available to you.
How does a HELOC work?
HELOC stands for home equity line of credit, or simply “home equity line.” It is a loan set up as a line of credit for some maximum draw, rather than for a fixed dollar amount.
A HELOC is kind of like a credit card that is borrowed against the equity in your home, you determine an amount you qualify for with your bank and then they set up a revolving line of credit for you to use and pay back as you go for a set term.
For example, using a standard mortgage you might borrow $100,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $100,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways.
Most HELOCs are second mortgages. An increasing number, however, are first mortgages, as yours would be if you used it to refinance your existing first mortgage. Using a HELOC as a substitute for a first mortgage can save a lot of money in the short-run, but is very risky.
HELOCs have a draw period, during which the borrower can use the line, and a repayment period during which it must be repaid. Draw periods are usually 5 to 10 years, during which the borrower is only required to pay interest. Repayment periods are usually 10 to 20 years, during which the borrower must make payments to principal equal to the balance at the end of the draw period divided by the number of months in the repayment period. Some HELOCs, however, require that the entire balance be repaid at the end of the draw period, so the borrower must refinance at that point.
Very flexible in how and when you can use the money and pay it back. A revolving line of credit allows you to tackle projects in phases over time. If other projects or emergencies pop up, you have this line of credit as a “back burner” fund to help you.
Once the repayment period kicks in you will have additional monthly payments on top of your mortgage and other monthly obligations. The monthly payments will fluctuate based on how much of the line of credit you are using. Percentage rates are typically a bit higher and you will pay more towards interest over the term of the loan.
How does a home Equity Loan Work?
A home equity loan — also known as a second mortgage, term loan or equity loan — is when a mortgage lender lets a homeowner borrow money against the equity in his or her home. If you haven’t already paid off your first mortgage, a home equity loan or second mortgage is paid every month on top of the mortgage you already pay, hence the name “second mortgage.”
When you get a home equity loan, your lender will pay out a single lump sum. Once you’ve received your loan, you start repaying it right away at a fixed interest rate. That means you’ll pay a set amount every month for the term of the loan, whether it’s five years or 15 years. This option is ideal if you have a large, immediate expense such as the need to finance a paint job. It also comes with the stability of predictable second-mortgage payments.
The amount of money you can borrow with a home equity loan or second mortgage is partially based on how much equity you have in your home. Equity is the difference between the value of your home and how much you owe on the mortgage.
An example may help illustrate: Let’s say you own a house now valued at $300,000. You put down $30,000 when you bought it and have paid down $30,000 in mortgage principal. You would have $60,000 in equity ($300,000 value of home – $240,000 still owed = $60,000 in equity) in the home. The lender would use this equity number — in addition to your credit score and income — to determine how much of a loan you will get. Your lender will need to pull your credit report and verify your income to determine the interest rate you’ll pay for your second mortgage.
This is a more predictable loan as far as monthly payments are concerned, you set a lump sum and a schedule on paying it back. Less interest being paid over time versus a HELOC.
Less flexibility in how much money you can use and when. If your budget goes up midstream through a huge remodel project or if you have an emergency project you can’t cover with savings, you’re stuck with the loan you have and may require other means of funding the project.
How do in-house financing options work with your paint contractor?
That is very dependent on what financing options your specific contractor offers to finance a paint job. Some contractors don’t offer any financing options, so be sure to ask up front.
Common types of in-house financing options are a deposit upon completion of the work of 50%, followed by a set term of monthly payments to pay the remaining 50%. Typically a few months, like 2-4 months. There may be a small fee added to your project to utilize this option.
Others will allow you to set up a payment plan, like a 90 day payment plan. You essentially have 90 days to pay off the full amount of the project. This may also come with a small fee to exercise this option.
This can be a great way to get the project done sooner and have the flexibility to pay it off quickly, but over a few months time so it doesn’t drain your personal savings too quickly.
The fees are typically small, much smaller than the amount you’d pay in interest to a bank for a HELOC or Equity loan.
If you fail to pay your contractor in a timely fashion, they may choose to place a lien on your home. Terms are fairly loose with contractors, so sometimes it can be a bit frustrating if they aren’t clear with the ins and outs of what they expect from you and what you can expect from them.
How does working with your contractor and a third party to finance a paint job work?
More and more contractors are offering third party financing options to finance a paint job. Basically your contractor has made an agreement with a lender to offer you options to borrow money to pay for your project.
Your contractor will have you contact their lender so you can qualify for the amount of funds you require for your project, they typically require a credit check and verification of income. There may be one single loan option or several options, it depends on what the contractor and the lender offer. The contractor pays a fee to the lender in order for you to secure one of their loans.
Example: Your paint project is $5,000, you qualify for the $5,000 loan through the third party lender. They write up the loan and send it to you to sign off on. Once the project is complete the lender pays the contractor directly and you are responsible for fulfilling the terms of the loan agreement and paying back the lender.
Most lenders offer one year or two year “Same as cash” loans that are interest free if you pay off the full amount within the set term. However, if you DO NOT pay off the full loan within the set term, you will incur the interest on the full loan amount, which is typically a very high rate of interest- usually around 15%-25%.
If you are responsible and can make sure to pay the loan off in time, this is a great way to fund a paint project or other home improvement, as it is essentially free money- you borrow $5,000 and pay back $5,000 without incurring additional fees or interest.
It allows you to paint now and pay later without costing you more in the long run if you pay it off in time. These are easy loans to qualify for and offer reasonable monthly payments so you can lessen the burden of a project you don’t quite have the funds for.
If you DO NOT pay the loan off in time, you are getting hit with a HUGE amount of interest on the full amount of the loan.
Recommendation when utilizing this type of loan:
DO NOT pay the minimum monthly payment set up by the lender and instead take the total sum of the project, divide it by *11 months for a 12 month term or *23 months for 24 month term- and pay that amount per month. This will ensure you are not on the hook for the costly 15-25% interest of the full loan amount if not paid off in time.
*Always divide your total loan amount by one less month than you have to pay it back so you make sure to pay it off in time!
Example: ($5,000/12 months same as cash loan with 15% interest) If you borrow $5,000, then take $5000/11= $454.55. So pay $454.55 every month and the loan will be paid off in 11 months with no risk of incurring additional cost to you. As long as you pay off the full loan amount in the set term, the 15% interest is waived.
Example: ($5000/12 months same as cash loan with 15% interest) If you borrow $5,000 and pay the monthly minimum payments and fail to pay off the full loan amount within the 12 month term- you would owe the additional 15% on the full $5,000 amount, or $750 in interest. Total job cost would then be $5,750.00 you’d have to pay the lender.
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