Ways to Finance a Major Remodel
You have the vision, now where do you find the money to pay for it? Financing a remodeling project can be a daunting task. Here are your options:
This is by far the simplest option – no forms to fill out, no appraisals to go through, no waiting on approvals. The one drawback? The money spent could otherwise be earning interest in an investment. By financing your project and putting your cash into a higher-return investment, it could actually cost you less in the long run. In addition, a remodeling project paid in cash is not tax-deductible, unlike most home improvement loans.
Home Improvement Loan
Two special home improvement loans are available through the Federal Housing Administration (FHA). The first, a Title I loan, allows you to borrow up to $25,000 for a single-family dwelling at a fixed rate. You must go through an approved Title I lender. The second, a Section 203(k) loan, is an option for those who purchase fixer-uppers. You can apply for a single, long-term, fixed or adjustable rate loan for the acquisition and rehabilitation of the property. You must go through an FHA-approved lender for this option.
Home Equity Line of Credit
A form of revolving credit, this option has your home acting as collateral. The line of available credit is usually set at 75 to 80 percent of the appraised value of your home, less your mortgage balance. Also taken into account are your credit history and ability to pay. Typically a variable interest rate is applied, and you’ll also run into costs when you set up the loan.
The good news is that once the line of credit is established, you can tap into these funds whenever you want. The downside? If you are a new homeowner, you may have little actual equity built up. Also, for some it can be difficult to avoid overusing the line of credit.
Home Equity Loan (or Second Mortgage)
Typically a fixed-rate, fixed-term loan based on the equity of your home, this option is paid back in monthly installments like your primary mortgage. While most lenders offer loans up to 80 percent of the appraised value of your home, some may go as high as 100 percent. Along with your credit history and your ability to repay the loan, the balance of your primary mortgage is factored into the equation.
If you’ve owned your home for a while, especially if you purchased it at a high interest rate and the current interest rates are lower, this might be a great option. You would need to have your house appraised and go through a new loan process, which would allow you to pay off your remaining mortgage. The leftover funds could then finance your project. This may not be the best option of you’re planning on moving within a year or two.
No matter how you decide to finance your remodel, staying within your budget is always good advice. One way is to figure out what you can afford to spend, and only budget 80 percent of that amount. That way, the remaining 20 percent is there for any unforeseen issues that come up during the project.