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Should I save up enough cash to do home renovations, or can I take out a loan? Our house needs a new kitchen floor as the linoleum is actually ripped in some areas, and the wood is exposed... This is going to cost $1500 to fix.. it's going to take a few months to save for that.. ideas?

  • $1500 is nothing I'd just take the loan – GBa Feb 15 '12 at 17:26
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Is it a safety thing? If the heat pump goes out you replace it immediately, if your floor looks bad but you aren't tripping, I would suggest saving. Use the extra time to find a great deal and educate yourself on your options. Maybe even take a class and learn to do it yourself.

In these rough times, anything I can save for and pay cash I would. The exception is if you can finance with 0% interest for a period of time and you have enough money to pay that off.

The last consideration I can think of is if you plan to sell the home soon? For that you might be getting more value than the loan and a real estate agent would be probably know best.

  • 4
    I agree with this answer except for the 0% interest part. You have to be really careful with the no interest loans because if you aren't diligent in paying it off, they typically turn into high interest loans and you have to pay back interest (or the interest over the initial 0% period). Saving to pay with cash will typically result in you paying less because you'll look harder for good deals and be able to time sales. I wouldn't borrow for anything that isn't a safety issue. – harmanjd Jan 16 '10 at 16:02
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    Very true about the 0%. I am learning the older I get the bigger my family gets the less disciplined I am about savings. Perhaps 0% offers are no longer good deals for me. The lesson is to know thyself! – MrChrister Apr 10 '10 at 15:53
  • I understand that if everybody thought like me, my money ideas wouldn't work,but, why wouldn't you put it on a credit card that pays you to use it? 1% or 15$ in my pocket would be fine with me. – Tim Jun 14 '10 at 1:35
  • @Tim, as long as you are able to pay the $1,500 on your card off right away (with cash), that's a great idea. If not, then the $15 savings shouldn't really change the decision-making process of cash vs. credit. – Sean W. May 12 '11 at 16:43
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I agree with MrChrister about first considering how necessary the renovations are (is it a nice-to-have, or a need-to-have?), as well as the importance of consulting a Realtor, if you are selling your home, as they will advise you wisely. For instance, they might advise you to replace the linoleum with a neutral beige ceramic tile, as you would be assured a better resale value on your dollar spent, than if you were to replace the old linoleum with new linoleum (or laminate).

There are many types of renovations that simply don't pay off, and others that do provide good return-on-investment (like intelligent kitchen and bathroom updates). I found this ROI grid at lendingmax.ca (which is pretty consistent with what I remember reading in the Toronto Star this spring):

Top 10 Renovations ~ Average return on investment

Painting and interior decorating = 73%

Kitchen renovations = 72%

Bathroom renovations = 68%

Exterior painting = 65%

Flooring upgrades = 62%

Window/door replacement = 57%

Family room addition = 51%

Fireplace addition = 50%

Basement renovation = 49%

Furnace/heating updating = 48%

If you are selling your home, and your Realtor has suggested improvements, they are probably necessary, and not doing them might serve as an impediment to quickly selling your home - so factor in the (potential) costs of carrying your home for additional weeks/months, or worse, overlapping mortage costs, if it takes your home longer to sell, and you end up owning two homes simultaneously for a bit.

As far as your question (should you pay cash for renos or take out a loan), one factor to consider if you live in Canada is the Home Renovation Tax Credit, which applies to renos that take place until Feb 1, 2010, and can deduct up to $1,350. So if you have to do a reno and yours qualifies for this tax credit, and you won't have the cash before that deadline, factor in the cost of borrowing vs. the $1,350.

Good luck!

  • I like the chart, that could be handy. Even if the numbers are off a tad over time, the source seems credible. – MrChrister Dec 11 '09 at 21:44
  • Just a note: The Home Renovation Tax Credit is 15% of money spent in excess of $1000, to a maximum credit of $1350. So, strictly on the $1500 reno, and assuming no other expenses qualify, the credit would be ($1500 - $1000) x 0.15 = $75.00. – Chris W. Rea Dec 11 '09 at 21:52
  • Thanks for the post. The chart is very interesting reference. – Cart Dec 16 '09 at 16:17
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I have a different take on this. If it would only take 3 months to save up to pay for it, line up the work now. Shop with your spouse to find the exact floor you want. By the time you hire the store to do the install, a month will have gone by, by the time the charge bill comes in, you'll be able to pay 2/3 off, and pay in full next month.

Note: I see this was asked in December. For those carrying no debt at all, I'm not adverse to a purchase of this type getting partially floated on a credit card for a month or two. Not a pair of shoes, or golf clubs, but a kitchen floor? The $10 interest is worth it to not walk over a ripped up floor in your home.

  • Yes. One should think of renovations less in terms of "investment" and more in terms of "consumption". Think of it as renting the renovated kitchen floor for a few extra months. Is it worth the interest expense? Probably, unless you're really hard up for money. But you decide. – user296 Feb 13 '12 at 21:13
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It depends on your situation. If your floor is broken, fix it. If you don't have $1,000 on hand, spend appropriately. It seems silly to be doing ROI calculations on the potential impact on resale value.

It's sillier to blow money frivolously, whether you do so with cash or credit. I'm assuming that if you have a broken linoleum floor that the kitchen isn't new, so it doesn't make sense to install your "dream tile" into the kitchen. Skip the imported travertine or wood and buy some nice linoleum and hire a handyman to put it in or install it yourself. You can probably do this for $500-700.

If you have longer term plans for the kitchen, get them on paper and figure out what exactly you want to do and when you'll be able to do it.

  • @George Marian: Thanks for the edit -- my grammar is suffering this week! – duffbeer703 May 13 '11 at 18:49
  • Hehe. I know the feeling. :) – George Marian May 13 '11 at 23:37
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I know that both Lowes and Home Depot (in Canada at least) will offer a 6 month deferred interest payment on all purchases over a certain dollar amount (IIRC, $500+), and sometimes run product specific 1 year deferred interest specials.

This is a very effective way of financing renovations.

Details:

You've probably seen deferred interest -- It's very commonly used in furniture sales (No money down!!! No interest!!! Do not pay for 1 full year!!!) (Personally, I think it's a plot by the exclamation point manufacturers)

It works like this:

  1. Buy something - Say $2000 item
  2. Interest accrues, but is not charged over the term of the loan.
  3. On the end date of the loan, if the entire principal is paid off, then the interest is never charged.
  4. However, if on the end date, you owe even one penny, then the entire accrued interest is added to your account.

Typically, I manage these types of purchases by dividing the principal by 6, and then adding 5%, and paying that amount each month. Pay close attention to the end date, because you do not want to pay 22% interest on the entire amount.

This also requires that you watch your card balance carefully. All payments are usually put to current purchases (i.e. those not under a plan) first, before they are applied to the plan balance. So if you are paying 250 a month on the new floor, and run up another $150 on paint, You need to pay the entire new balance, and then the $250 floor payment in order for it to be applied correctly.

Also <shameless plug> http://diy.stackexchange.com </shameless plug> Consider doing it yourself.

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