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 If you've ever purchased a "used" home, you can probably relate to this particular topic - financing home improvements. When you bought that home, you may have decided to pass up that "fixer upper" for something that is in "move in" condition.
Financing Your Home Improvements
But experience tells us that unless you're buying a home that is covered by some kind of lifetime warranty, you can expect to pay a lot for home improvements. And you can take that to the bank!
In this article, we're going to discuss some of your alternatives to home improvement financing. You see, not everyone buys a new home and has a large cash reserve set aside to pay for that new found leaking roof. Chances are that you may have even stretched yourself when reaching for your new dream home, leaving your bank account quite empty.
Home Financing Guidelines
So what are some of the simple guides you can go by when seeking financing for a home improvement project? One overriding rule has to do with equity in the home. If your project adds significantly to the equity in your home, then a long-term financing option makes sense. If not, well... let's look at a couple of examples to explain this concept.
Remodeling a Kitchen
Let's say you decide to remodel a kitchen. It is very likely the new kitchen will add significantly to the resale value of the home. Therefore, when you eventually sell the house, you can expect to recover some of the financing costs of the kitchen.
The additional equity you now have in the home can be used to pay off the remaining balance, if any, on the project financing.
Replacing a Home's Roof
But let's say you decide to pay a contractor put a new roof on the house. Now that new roof might look pretty from the outside, but most people buying a new home expect the roof to be watertight. A new roof might add somewhat to the value of the home, but it would not be significant.
So the chances are that the investment in a new roof will not add significantly to the value of the home and you would not be able to recover those costs when selling the home. This means you would want to fund this home improvement project with a short-term financing.
So the guiding rule here with respect to financing has to do with the ability to leverage the increased equity you have via the home improvement project to payback the loan in the event you sell the home before the loan term has expired. So to summarize:
- If a home improvement project adds significant and lasting value to the home, then your financing choice can be more long term.
- If the home improvement adds little perceived value to the home relative to its cost, then you are better off choosing a short term financing arrangement.
Remodeling Projects that Add Value
Home improvement or remodeling projects that will add significant value to almost any home include bathrooms and kitchens. In some real estate markets, these two projects can actually pay for themselves many times over in terms of added resale value of a home.
Decks and fences are often fairly inexpensive projects that add value to a home due to their perceived increase in functionality and privacy. Finally, new windows, building home offices, finishing a basement or attic space are other types of home improvements that take existing space in the home and make those unfinished areas into comfortable living quarters.
Long and Short Term Financing Options
So what exactly are your long and short-term home improvement financing options if you decide to go ahead with your home improvement project?
Short Term Financing Options
When it comes to short term financing you're got two readily available options:
- Home Equity Line of Credit - A home equity line of credit is an adjustable rate line of credit where lenders would typically allow borrowers up to 80% of the home's value minus the balance on any exiting mortgage.
- Personal Loan - This is a short term loan similar in concept to a new car loan. One of the negative aspects of this type of financing arrangement has to do with the interest charges - tax deductions are not always allowed on a personal loan.
Long Term Financing Options
If you're thinking about remodeling a kitchen, then you've got a good reason to seek a longer term financing arrangement including:
- Value Added Mortgages - These are loans can be taken out for up to around 90% of the remodeling costs. This type of loan includes improvement loans such as Fannie Mae's HomeStyle mortgage plan.
- Refinancing an Existing Mortgage - These are loans for up to 80% of the home's appraised value. Refinancing your mortgage is basically swapping out your old loan and leveraging the built up equity in the home to refinance under a larger loan.
- Second Mortgage - If you decide to take out a second mortgage, the term on these loans can range from 5 to 20 years and up to around 80% of the value of the home minus the balance on an existing mortgage. Closing costs may apply here and include things like a title search, application fees and points.
Mortgage Calculators
If you're thinking about starting a home improvement project or remodeling your home and you want to get a better feel for how much that project is going to cost you each month, we can help. We've got an extensive collection of online mortgage calculators and loan calculators that can help you figure out the impact of your home improvement plan on your family's finances.
About the Author - Home Improvement Financing
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