Financing

-When considering the home improvement of your dreams, be aware that while your quality of life can be enhanced, so will the value of your home. Costs of renovation projects vary widely, so establishing a finite budget and a means of financing that is best for you and your family is of primary importance. Today there seems to be more financing options than ever before. What suits you best depends on a number of factors.

What is the estimated cost of your project going to be?

Obviously, it’s wise to approach multiple contractors for costing proposals, but you have to do your own research as well. Material costs, as well as the scope of the project will vary, so knowing how your decisions in these areas will affect the overall cost prior to starting can save you money and stress in the end. Remodeling Magazine offers an annual Cost vs. Value Report. It is a valuable tool to establish, at least, the ballpark in which you are looking to play, as well as the percentage of money you can hope to recoup at resale. Here is the latest:  Cost Vs. Value 2018

How much equity do you currently have in your home?

The equity you have built in your home will be a valuable resource in financing your project. Whether you are borrowing against this equity, or refinancing your current mortgage to take advantage of lower rates, knowing this amount is important to maximize the value of the investment into your project and determine the best way of paying for it.

Do you need a lump sum up front, or can you draw on it as necessary?

Most reputable contractors will offer a pay as you go draw schedule and not require large advances to begin construction. Depending on your loan, your lender may also prefer this method and require progress payments to be made as certain milestones are achieved. The duration, price, and payment method could factor into meeting your budget as well as determining the best financing method available to you.

Would you prefer to make amortized payments or follow a more flexible schedule?

The rates and terms of financing available to you could be quite diverse. Consider the time period you are comfortable with for repayment. A longer term or more structured repayment option might be more conducive to planning your budget. You might prefer instead more control over when, and how much you repay, that a shorter, more flexible option might offer.

How comfortable are you with certain risk factors?

Take into account how different financing options will impact your current situation. Whether or not you use collateral to secure the amount you borrow will affect the cost of repayment as well as the risk you take in doing so. Identify the pros and cons of your options when considering using the value and equity in your home, or your credit, to pay for your project.

Here is a brief overview of some of the most common financing options available for remodeling your home:

Lending Club  is a great alternative to traditional financing.  They are the world’s largest online marketplace.  In connecting borrowers and investors they are transforming the banking system to make credit more affordable.  They can operate at a lower cost than traditional bank lending programs.  The end result is passing the savings on to borrowers.  It is also one of the fastest ways to turn around a loan.  It is worth comparing to the more traditional methods listed below.

Refinancing your mortgage is an option to consider if you’ve already built some equity in your home and you’re planning a major renovation. This option could also allow you to pay for the entire renovation up front. Depending on your equity or the terms of the new mortgage, you may be able to decrease the amount or term of your current mortgage, or add to the value of your home without increasing either too much. Also, If you’re adding something structural (as opposed to simply redecorating) lenders may approve you based on the projected value of your home after the project is complete.

A home equity loan works much like a conventional first mortgage. You can borrow a lump sum that is secured against your home, and the payments are amortized over several years. Usually, the interest rate and monthly payment remain fixed throughout the term of the loan. This option requires an additional payment on top of your first mortgage and usually carries a higher interest rate than refinancing your mortgage. However, the closing costs may be lower and if refinancing your mortgage isn’t in your best interest, a home equity loan could be a better choice.

A home equity line of credit (HELOC) is a good choice if you’ll be paying for your project in stages. With this option, the lender agrees to advance you money up to a specified limit, and you access the money as needed with a credit card or checkbook. This can be a more flexible option and also makes it relatively easy to pay for materials and contractors performing work as the renovation progresses. Monthly payments can be lower than those of a home equity loan, since you have the option of paying interest only on the money you withdraw. The other important difference is that HELOCs carry adjustable interest rates, while home equity loans typically have fixed rates.

A personal loan or line of credit may be all you need for a smaller project. The fees to set these up can be lower than those for refinancing your mortgage or tapping into your home’s equity. Keep in mind; personal loans are not secured with your home, so they usually carry a higher interest rate. Also, the interest paid on a personal loan will not be tax deductible as the interest on your mortgage may be. Always consult a tax professional when determining how your borrowing method might impact your liability to the IRS.

FHA 203(k) mortgages are FHA-insured loans that allow you to simultaneously refinance your current mortgage and combine it with the cost of your improvements into a new mortgage. The loan is also based on the value of your home after improvements, rather than before. Because your house is worth more, your equity and the amount you can borrow are both greater. With this option you can also choose whether to hire a contractor or do the work yourself. The downside can be that loan limits vary by county and tend to be relatively low, so they might not be the best fit for all projects. The usual term is 30 years.

Energy-efficient mortgages (EEMs) might be worth looking into if your home’s R-value is the envy of your block. An EEM from Fannie Mae or elsewhere could boost your debt-to-income ratio by up to 2 percent. Utility bills are lower in energy-efficient homes, so the homeowner can afford to borrow more. EEMs have been used for new construction but lenders are now pushing them for existing homes as well. In order to qualify for an EEM, your home may also have to meet the lender’s stringent energy-efficiency standards.

– Once you have an idea of how much you are willing to spend on your project, and have considered some of the different factors that will determine what option is best for you to pay for it, it’s time to find a lender. Your financial advisor, current credit union, or banking institution is a great place to start. Most will offer a wide variety of financing methods and often existing customers can qualify for better rates. Keep in mind however; most lenders and mortgage brokers now are pretty competitive so it’s smart to shop around. Consult your family and friends during this process. Personal recommendations and references from first-hand experience can be extremely helpful.