Home Improvement Solution

Posts Tagged ‘Home Equity Loan’

Homes need updating. Aside from the cosmetics of tiles and paint colors, there are the basic, but necessary renovations that need to be taken care of as well.

Young home buyers frequently enter into a mortgage commitment scraping together all they have to offer a decent down payment and having calculated what they need to be able to afford the monthly payments. What they may not take into as serious account are the monthly utility bills and the eventual (inevitable) costs of house and property upkeep.

Those requirements may be acknowledged as necessary somewhere down the road, but since they are not immanent, the couple may simply assume they will come up with the money from somewhere when the needs are more pressing.

However, from re-shingling a roof to weather-proofing your windows, major home improvement projects are a part of home ownership. Unfortunately, they’re also costly and there isn’t always room in the family budget for a full overhaul of the heating and ventilation system. That’s where home improvement financing comes in.

For those who don’t have much extra money saved, home improvement financing allows homeowners to borrow what they need for renovations. Sometimes the house itself is used as equity and in other situations, little to no equity is required. Keep reading to learn about the different types of home improvement project financing.

Home Equity Loan

The terms for any loan, including a home improvement or renovation financing loan, will vary depending on the borrower. If you have good credit, your mortgage is paid off and you’re willing to put your house forward as equity, then you can expect to get great rates payable over a period of months or years.

You could even opt for a second mortgage, which will get you rates close to prime. However, while a home equity loan obtains for you a lump sum up front, remember that you’ll start paying interest on that entire sum right away.

Line of Credit

One of the easiest ways to borrow money is through a home equity line of credit. A line of credit allows you to only borrow as you need, therefore only paying interest on what you use. The rates, if your credit is good, are great and they’re often approved fairly quickly and painlessly.

Remodeling or Home Improvement Loan

Many banks offer remodeling or renovation-specific loan programs. These work by combining a construction loan with a mortgage and are based on the projected value of the home after you complete your project.

You will most likely have to submit a building plan as well as a breakdown of all your project expenses. The bank then usually releases the money in increments, as the project progresses.

Credit Cards

If your credit isn’t as good or you’re still building it, you may opt for a small amount of financing that will let you complete the project without being overwhelmed by debt. An example of this might even be store credit from a local store – just enough to purchase a new furnace or the materials you need to retile your floors.

You’ve got your eye on the out-dated kitchen or you think you might want to just tear up your carpeting and install hardwood floors, but before you start to rip out the cabinets or the carpet make sure to establish some guidelines for your home improvement plan. A good home improvement plan should take into account: budget, financing, scope of work, functionality and aesthetics, resale value.

Budget Considerations

One good way to find out what you can afford is to simply get three estimates from contractors. Discuss what you want with the contractor and if the estimate is high, ask them how you can reduce the costs. The estimate should be separated into cost of materials and cost of labor. By getting a professional opinion first, you may find that the bids are very similar and you have a good starting point for the high-end cost of your project.

Now, you can begin to factor in whether there is some work you can do yourself. This will improve the amount of cash outlay necessary to complete the work. Another way to get to meet your budget is to shop for a cheaper source of materials or change the type of material used. Either way, these are highly flexible items in your home improvement budget.

Sources of Financing

If one doesn’t have the money, the inclination is not to do the home improvement. Cash, however, is not the only way to pay for a home improvement plan, you can also finance. If you find you don’t have enough cash, you can use a home equity loan to finance the remodeling of your home. Try to identify additional forms of financing in case you need additional monies to complete the project. In the end, a home improvement project should add to the resale value of your home for it to be a sound purchase.

Scope of Work

This is where a good plan is essential. If you are planning a major remodel, you will want some basic plans drawn up, preferably by a professional. You don’t want to find out later that the wall you envisioned removing for a more open space is a critical weight-bearing wall. Similarly, you don’t want to plan for electronic appliances and devices in an area where there are no outlets. If you plan on revamping a kitchen, the dimensions of workspace and appliance real estate are very important. Don’t try to eyeball it or you’ll end up paying for it later in time, additional work, or wasted purchases. By trying to define the scope of the work on paper first, you can bypass many of the simple problems that arise from not having thought the improvement plan out thoroughly.

Functionality And Aesthetics

Obviously, we don’t just want to substitute one thing for another, we want the new home improvement to outshine the old room. We want it to work better for us and we want that “ah” factor too. Have you done your research on the functionality of the appliances and space arrangements? How about the aesthetics and maintenance of the materials you chose? Does the improvement help to accommodate the growing needs of your family? Will it continue to be of service after 5 years? 10 years? These are all factors that should be considered and weighed against budget, scope, and resale value.

Resale Value

This is a tricky value that can’t really be foreseen that much. We know that kitchen and bathroom remodels recoup the most on the sale of the house. No home improvement will recoup 100% of the price it took to remodel, however, if you are in a climbing real estate market that might not matter. What you don’t want to do is to add a home improvement that detracts from the value of your property. Adding a fifth bedroom in a neighborhood of four bedroom homes would be detrimental to the value of your home. Adding a swimming pool in areas where houses with pools don’t sell well would also be considered an investment that could not be recouped. Some people still do it anyways. The point is that most home improvements are done to meet the needs of a particular family and the desire for a more comfortable living space. While resale value is important, it is just one of the many considerations that have to be evaluated in a good home improvement plan.

Choosing what type of home improvement loan is best for you can be very confusing. There are many types of loans available and each has its own advantages and disadvantages. Here is a brief look at the options.

Probably the most popular type of home improvement loan is the home equity loan. This is a loan secured by the equity you have available in your home. These types of loans come in the form of a loan or a line of credit. The loan has a fixed interest rate, term, and payment. A home equity loan is best suited for people who know just how much they are going to spend and are going to spend it in a relatively short period of time.

The home equity line of credit works more like a credit card. You have a certain amount available and you can use as much or as little of that amount as you choose. You only pay on the amount of the line that you use. There is usually an annual fee associated with a home equity line of credit. This type of home improvement loan is good for people who are not sure of the amount they want to spend or are going to spend the money over a longer period of time.

With both types of home equity loans the rate that you will be given is going to be significantly lower than any other type of loan. These home improvement loans also have great tax advantages. Generally speaking, if you are able to deduct the interest on your first mortgage on your taxes, you should be able to do the same with the interest on your second.

Another type of home improvement loan is the personal loan. This is an unsecured loan, meaning that there is no collateral securing it. It is sometimes referred to as a signature loan. These loans will always come with a higher interest rate than a loan that is secured, since the risk of default to the lender is greater. These also come in a loan and line of credit form. Personal loans do not afford you any tax advantages.

You can also look into what is known specifically as a home improvement loan. These are typically unsecured loans that are designated specifically for home improvements. Sometimes, however, these loans will be secured by the home itself. They normally have a higher interest rate than a home equity loan.

Another option is to roll your home improvement costs into your first mortgage and completely refinance your home. You will get the lowest overall rate and have the advantages of only one payment You should consider whether or not you have a prepayment penalty on your current mortgage and whether the new loan will be a higher or lower rate overall. If you have enough equity in your home, this could be something to consider for many reasons, including the tax advantages.

These are just some of the considerations that you should make when searching for the right home improvement loan. Think about what kind of payment you can afford and when all of the money will be spent. Choosing a loan with tax advantages is going to be the smartest way to go, but the other options may work great in your situation.