Financing Your Home Improvement Project
Building a new house or renovating an existing house can be an exciting way to make a home uniquely yours. But, just as the design requires careful planning and consideration, so does the method of financing the construction process. Whether you hire a contractor to do a complete kitchen remodel or you decide to tackle a new deck, chance are you will need money to complete the project.
Here’s a step by step process to finance your home improvement project. What type of financing is available? Which is best? What is a remodeling or renovation loan? How do they differ from other mortgage loans? What are draws? How does the draw procedure work?
Renovating Your House
When remodeling an existing house there are several financing options.
1. Personal savings
You can pay for the improvements using your own money.
2. Personal Loan
You can get a personal loan from a lender up to $35,000. These loans will let you pay back over several years and do not require a lien on your house.
You can refinance your existing mortgage with a new loan based on the appraised value of your house with the improvements completed. Refinancing is a an expensive option but is most suitable when the remodeling work is extensive. This type of loan will require the lender to approve the remodeling contract and make disbursements to the contractor.
4. Second mortgage.
You can get a fixed rate second mortgage that will also reflect the appraised value of the house with improvements completed. Expect to pay a higher rate of interest for a second mortgage, than for a first mortgage. However, the upfront cost are considerably less. Depending on the size of the second mortgage, the lender may also make periodic disbursements to the contractor rather than giving you the entire loan proceeds at once.
5. Equity line of credit.
A bank will grant a home equity loan based on the value of your house, less the amount of the first mortgage. Home equity loans are like credit cards. You can borrow up to the limit of the loan and then pay the loan down and borrow again.
The interest rates on home equity loans are not fixed and float with prime rate. This type of loan is somewhat riskier than a fixed rate mortgage and the interest are usually quite high compared to second mortgages. Thus, for purposes of home improvement, the second mortgage is preferred.
Value of Remodeling
Be aware that the value of the remodeling does not always increase the value of the house. For our purposes, it will be useful to describe the different types of rehabbing or remodeling.
First, there is the addition to the house. Perhaps you want to add an extra bedroom or family room or an “in-law suite” for an elderly parent. When making such additions you want to make sure that they will complement you house and add to its value. A bedroom that is tacked on so that it can only be accessed through another bedroom does not create additional value.
Home additions should be made with resale in mind. Will a potential borrower want to buy your house and be willing to pay a premium for the additional work you have done?
Other forms of rehabbing or remodeling might not take the shape of an addition. Updating an old kitchen or bathroom can add real value to your home. Again, the value it adds will be in direct proportion to the good taste exhibited.
Do your homework
Before starting rehab work, get some current remodeling books and get an idea of what you want your finished project to look like. You will also find many money saving ideas including estimating costs.
It is also a good idea to visit model homes of large builders in your area. The builder models will usually reflect the latest trends in home decor. For example, the kitchen might show dark wood cabinets with white appliances. That is a good indication that this type of decor is currently popular.
On the other hand, your home improvements might only bring your house up to date or repair years of neglect. However, the improvements will increase the value of your home and help the house sell faster.