By Ann Robinson and Annie Vernon
Happy New Year! The holiday rush is over, and the time for resolutions is here. So what are some of yours? Get your body back in shape? Get your budget back in shape? What about getting your home in shape? Is this the year of the remodel?
If so, one of the biggest questions about remodeling is how to pay for it. According to the National Association of Home Builders, half of all homeowners who undertake remodeling projects of $5,000 or more need to borrow money to pay for the work. Here are some ideas, courtesy of Steve Holliday at Holliday Financial, on how to finance a remodel.
Home equity lines of credit: An equity line of credit is like a variable interest rate credit card secured by your home. Instead of receiving a lump sum of cash, you can borrow against your credit line whenever you want. Rates are adjusted quarterly. Home equity lines of credit can usually be arranged in a few days. This type of loan often has good rates, and the interest may be tax deductible.
Using your home as collateral, there is a variety of loans available to help finance your home improvements.
Home equity loans: With a home equity loan or second mortgage, you are loaned a specific amount. You repay the loan in fixed monthly payments over a fixed period of time; 10- and 15-year loans are common. The interest rate depends on your credit, the loan-to-value ratio and current interest rates. Interest paid is usually tax deductible. Plan on paying closing costs, and allow two to three weeks for the application.
Cash-out refinancing: If you owe less on your home than it’s worth, you can refinance your first mortgage for more money than you currently owe to get cash to remodel. Depending on your circumstances, this option may actually lower your house payment or at least allow you to keep the same monthly payment. Refinancing may carry high up-front costs and may take three to four weeks to arrange. But you may also get a better overall interest rate, and the interest should be tax deductible.
Unsecured consumer loan: An unsecured consumer loan may be a good option for a small home improvement project — less than $10,000. Most financial institutions offer these kinds of loans. Unsecured means that the borrower’s home is not pledged as collateral and there is no lien on the home. Instead, the security for the loan is the consumer’s creditworthiness. There is less paperwork, but the interest rate is usually higher and is not tax deductible.
One-time close construction loan: If you have a major renovation or a tear-down and rebuild in mind, then a one-time close construction loan may work best. This loan allows you to utilize you home’s future value to fund your project. This loan requires building plans and a project cost breakdown in advance of the loan application. The advantage is having the construction loan and the long-term loan in one transaction.
Now that you know your financing options, you can begin to consider how much you are willing and able to invest in a home remodel. Then it is time to turn to the more interesting aspect of the process — the design! Next week we will give you a “homework” assignment to get you off to a great start on your New Year’s resolution. As always, we welcome your home architect design questions at firstname.lastname@example.org.