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Updated on Thursday, September 13, 2018
There are many reasons homeowners choose to replace their existing air conditioning or HVAC unit, including a desire for greater energy efficiency or better functionality. Homeowners wishing to sell their properties may also want to consider upgrading their HVAC system first — especially if it’s old. Six percent of real estate professionals who participated in the 2017 Remodeling Impact Report from the National Association of the Remodeling Industry (NARI) and National Association of Realtors noted that an upgraded HVAC system recently helped them close a sale.
While it’s obvious a new HVAC system can lead to greater comfort in your home and perhaps even a more attractive resale proposition for buyers, there is one problem that comes with replacing your HVAC — the cost.
While the NARI remodelers estimated that replacing an HVAC unit ran consumers approximately $7,475 nationally in 2017, you may pay more (or less) depending on the size of your home and where you live. For example, HVAC system company Trane quotes a standard XR Series HVAC system for $5,600 to $7,800 (including installation) if you live in central Indiana and have a home that’s 2,000-3,000 square feet. If your ZIP code is 90210 and you live in Beverly Hills, Calif., on the other hand, the same system is estimated to cost $8,800 to $12,000. For a smaller-sized home — less than 1,000 square feet in this example — you would pay considerably less, however. In central Indiana, Trane estimates an HVAC system would set you back $4,600 to $6,600. In Beverly Hills, you would pay $6,800 to $9,400.
With these costs in mind, you may be wondering about the best ways to pay for a new HVAC system. Should you save up the cash or pull from your emergency fund? Or, would financing with a credit card or personal loan leave you better off?
At the end of the day, the right way to pay for a new HVAC system depends on your goals and your personal finances. Consider these loan and financing options as you move forward with your research.
A credit card can be a valuable tool when used with careful thought and consideration. It can make sense to finance an HVAC unit with a credit card in many situations, including ones where you can qualify for a low interest rate or even an introductory 0% APR on purchases.
Some consumers who have the cash to pay for their HVAC unit in full may choose to use credit for additional reasons such as earning cash back or travel rewards. If a consumer uses a cashback card that earns 2% back to purchase a $7,475 HVAC unit, they would pocket $149.50 in rewards with little effort on their part.
What to watch out for
While it could be smart to use a credit card to pay for an HVAC unit, there are several pitfalls to watch out for. Risks include:
- Length of introductory 0% APR offers: If you’re using a card that offers an intro 0% APR on balance transfers or new purchases, you’ll want to read the terms of your offer to see how long it lasts. Once your introductory 0% APR offer ends, the regular purchase APR will apply to any balance remaining after the end of the intro period. Some credit cards charge deferred interest, meaning you have to pay interest on the remaining balance and interest that would have been charged to the amount you paid off during the 0% APR period.
- High interest rates on rewards cards: While earning rewards on your HVAC system can make sense if you have the cash, it is not a smart move if you plan to carry a balance. Considering the average credit card APR is 15%, the rewards you earn would be dwarfed by the interest you’ll pay over the long run.
What to look for in a credit card when financing an HVAC unit
If you’re looking for a credit card to cover your HVAC purchase, it makes sense to consider your goals first. Are you hoping to secure 0% interest on purchases to save on interest?
If you’re seeking a card that offers 0% on purchases, you’ll want to understand how long the interest offer will last as well as any applicable fees. You can compare credit card offers right here on MagnifyMoney.
A personal loan is another option you can use to finance an HVAC system. This financial product offers many benefits that can be advantageous if you need some time to pay for your HVAC unit, including fixed interest rates, a fixed repayment schedule and a fixed monthly payment.
Depending on your credit score, a personal loan may also offer a lower interest rate than you might receive with a credit card or other types of financing.
What to watch out for
While a personal loan could be ideal if you need to borrow money for a new HVAC system, there are several details you’ll want to watch out for and understand:
- Fees: Some personal loans come with fees such as an origination fee. However, not all personal loans come with this fee or any upfront fees, so make sure to check.
- Precomputed interest: Precomputed interest is a complicated interest scheme that may leave you paying more interest than you would with a loan that doesn’t precompute interest — especially toward the beginning of your loan. You should avoid personal loans that compute interest this way.
- Prepayment penalties: Some personal loans may charge fees if you pay your loan off early. You should avoid personal loans that employ this “gotcha.”
What to look for in a personal loan when financing an HVAC unit
How much you’ll pay to access a personal loan depends on the interest rate and the fees you’re charged. With that in mind, you should compare offers to find personal loans with the lowest interest rate and lowest fees (or no fees). Also, make sure your personal loan doesn’t have a prepayment penalty so you won’t suffer financial consequences if you pay your loan off early.
Finally, make sure your personal loan comes with a monthly payment and repayment timeline you can live with. To compare loans and estimate the costs of borrowing, you can browse here.
Home equity loans
A home equity loan works similarly to a personal loan in the fact that both offer fixed interest rates, fixed monthly payments and a fixed repayment timeline. However, personal loans are unsecured loans, whereas home equity loans are secured by the equity in your home. Another option is a home equity line of credit (HELOC), which is a revolving line of credit secured by your home. HELOCs have variable interest rates, and you only pay interest on the amount you borrow, so your monthly payments will vary.
The amount you can borrow with a home equity loan is typically limited to 85% of your home’s value. For this reason, this option may not work for you unless you have considerable equity in your property. On a positive note, the interest rate you can qualify for may be lower than other financial products because the loan is secured by the value of your home. The interest you pay on your home equity loan may also be tax-deductible.
What to watch out for
Before you apply for a home equity loan, make sure you understand both the advantages and any potential pitfalls. Here are some downsides you’ll want to be aware of:
- Fees: Home equity loans come with many of the same fees as a traditional mortgage, including application fees, loan processing fees, origination or underwriting fees, lender or funding fees, appraisal fees, document preparation and recording fees, and broker fees. If these fees are wrapped into the cost of your loan instead of being charged upfront, you’ll pay more interest to finance them. HELOCs may have low (or no) closing costs.
- You could lose your home: Because home equity loans are secured by the value of your home, you could lose your home to foreclosure if you don’t repay the home equity loan.
- You may not qualify: These loans are intended for consumers who have considerable equity in their homes, which is why you can only borrow up to 85% of your home’s value in most cases. If you don’t have a lot of home equity, you cannot qualify for a home equity loan.
- Unpredictable costs: With a HELOC, your interest rate could change at any time. And because you don’t have fixed monthly payments and can carry a balance, you could end up with a hefty bill when it comes time to repay what you’ve borrowed.
What to look for in a home equity loan when financing an HVAC unit
If you’re considering a home equity loan to finance your HVAC purchase, you’ll want to shop around to find a loan with the lowest interest rate and fees you can find. The Federal Trade Commission (FTC) also notes you should ask if you’re paying any points (a fee you can pay to secure a lower interest rate), since points and other finance charges can lead to higher costs upfront.
The FTC also suggests comparing several loan offers to ensure each lender or broker is competing for your business with your best loan terms possible. Fortunately, you can compare home equity loans online with our parent company, LendingTree.
Company or contractor financing
Because some consumers need to borrow money to purchase a HVAC system, many companies that manufacture and install HVAC units offer their own financing plans. In most cases, they partner with a lender to offer in-house loans. While the terms of these offers vary, company financing can be a good deal if you can secure a low interest rate or 0% APR financing for enough time to pay your HVAC unit off.
What to watch out for
While financing your HVAC system through the company you purchase it from may sound convenient, there are several potential downsides. Watch out for:
- Short introductory offers: While some HVAC companies may be able to offer 0% APR on their products for up to 60 months, not all companies will offer zero-interest terms that long. Make sure you understand how long your 0% APR offer lasts, as well as how high your interest rate will be once it resets.
- High interest rates: Like other loans, the terms of your HVAC loan will depend on your credit score and income. Make sure to compare offers to find your best interest rate possible, whether that comes with company financing or another type of loan.
- Fees: Make sure to ask about any fees you may be charged for your HVAC loan.
What to look for in a company financing when financing an HVAC unit
If you decide you want to compare company financing for an HVAC unit with other financial products, you’ll probably want to call around and ask HVAC vendors in your area. You can also research HVAC companies that offer in-house financing online. If you decide to dive into this option, make sure to ask specifically about financing plans, interest rates and any fees you’ll have to pay to secure a loan. Since HVAC vendors use different banks to fund their consumer loans, the terms of these offers can vary widely.
Fortunately, it’s a lot easier to find information on credit cards, personal loans and home equity loans online. A quick internet search can pull up a treasure trove of information that can help you compare loan and financing offers to find your best deal. Having your HVAC financing lined up before you shop, you can be choosy when it comes to selecting an HVAC unit and the company you want to install it.
Will my credit score take a hit?
Several factors make up your credit score, including ones that can be impacted when you make a large purchase. “New credit” makes up 10% of your FICO score, for example, and opening new lines of credit in a short amount of time can make you seem like a greater risk. As a result, you may see an impact to your credit score if you open a new credit account to pay for your HVAC system.
How much you owe in relation to your credit limits makes up another 30% of your FICO score, and this figure will skew higher if you charge an HVAC system to an existing revolving line of credit (like a credit card). Many experts recommend keeping your credit utilization below 30% to keep your credit score in the best shape possible.