Financing a Home Improvement Project

Improving or updating your home – whether it is an addition, updating a kitchen or bath, or finishing the basement – improves your quality of life and increases the resale value of your home. These kinds of projects can cost tens of thousands of dollars, but there are several financing options available. To choose wisely you need to consider several factors:

  • how much you need to borrow.
  • how much equity you currently have in your home.
  • how much value your project will add to your home.
  • whether you need the money all at once or would prefer to draw on it as necessary.
  • whether you want to make amortized payments or follow a more flexible schedule.
  • your comfort level with placing a second mortgage on your home.

Your first steps should be to get pre-approved by a lender to determine how much you can spend, and to get an estimate from a qualified contractor to determine if your project is feasible with the financing that is available to you. Then here are your financing options:

A home equity loan

Works much like a conventional mortgage. You borrow a lump sum that is secured against your home, and is repaid over several years. Usually, the interest rate and monthly payment usually remain fixed throughout the term of the loan. This option requires an additional payment on top of your first mortgage and usually carries a higher interest rate than refinancing your mortgage. However, the closing costs may be lower and it can be right if you prefer not to refinance and you need the money for your renovation all at once.

A home equity line of credit

A HELOC is a good choice if you will need to pay for your project in stages. In this case, the lender agrees to advance you money up to a specified limit, and you access the money as needed with an ATM card or checking account, making it easy to pay contractors. Monthly payments can be lower than those of a home equity loan, since you have the option of paying interest only on the money you withdraw. The other important difference is that HELOCs carry adjustable interest rates, while home equity loans typically have fixed rates.

Refinancing your mortgage

An option to consider if you already have equity in your home and you are planning a major renovation. For example, if you want to borrow $45,000 to build an addition and you have $120,000 left to pay on a $200,000 mortgage, you may be able to take cash out by raising the principal on your mortgage to $195,000. This would allow you to pay for the entire renovation up front. Depending on the terms, your monthly mortgage payment might remain the same; only the length of the loan will be extended. If your project will be an addition (as opposed to simply redecorating) lenders may approve you based on the projected value of your home after the project is complete.

A personal loan or line of credit

May be all you need for a smaller project. The fees to set these up can be lower than those for refinancing your mortgage or your equity. The drawbacks? Personal loans are not secured with your home, so they carry a higher interest rate. But depending on the rate, they are usually more economical than using a credit card. However, interest on your mortgage or home equity loan may be tax deductible whereas interest on a personal loan is not.

How to Plan your Remodeling or home Improvement project and select a Contractor

Define your Goals

Write down the ways in which your home does not currently meet your

needs. Don’t worry about the design or budget of the project at this

point. That will come later. Just write down the issues you are trying

to resolve. Aside from what you need, also include anything that you just simply want. This is your dream list. For example:

  • “When we entertain the house is too small to accommodate our guests.”
  • “We’re tired of going up and down stairs to do the laundry.”
  • “We want a bigger more modern kitchen.”
  • “We want a bigger luxurious bathroom.”
  • “We need much more closet space.”
  • “I want a high tower from which to survey my domain.”
  • “We would like for our home to be more energy efficient.”
  • “We want to have a sunny, cheerful room that is appropriate for
  • houseplants, and family activities.”

If you have many separate items on your wish list at this point, try

to rank them by priority, and decide which goals are most important

to you. If you are able to solve these problems then you will

be more likely to be happy with the results of your project, and it

will allow a professional to help you design a project which will be

right for you.

2. Determine your budget

This may be the most distasteful, yet necessary part of the process. In

order to evaluate the practical limits of your budget you need to consider

several factors. Do you foresee selling your home in the near

future? If so, you will probably be concerned with recovering

your investment when you sell. If the total of what you paid

for your home and the cost of remodeling is going to significantly

exceed the value of the most expensive homes in your neighborhood then

your project may not be economically feasible. However after

five years or so other factors may be more significant. So, if

you have no intention of moving soon then the issue is completely different. Location

is everything, and if you love the location of your home and intend

to stay put then any amount of investment to make it into the home

you want may be justified. If you will be borrowing money

for your project, then you should talk to your lender to get an idea

of what your financial limits might be.

3. Find a Contractor

When it comes to finding a contractor, be an informed consumer. Before

you even contact a prospective contractor consider calling the Better

Business Bureau or the state board for licensing contractors to see

if they have any unresolved complaints or actions against them. Once

you have contacted a contractor ask them for references. Why

even waste the time to discuss your project in depth if these factors

might disqualify a candidate? A reputable contractor will be

delighted for you to check up on their business in advance.

“Horror Stories” about contractors abound. For example, the

contractor who starts a job and then disappears for weeks at a time. Or

the contractor who does a pretty good job, but then just won’t return

for warranty work. Or the contractor who goes grotesquely over

budget. Or the contractor who takes your money and then does

an all around shoddy job. One thing all of those stories have

in common. The customer didn’t check the contractors references. Don’t

make that mistake and you probably will never have a horror story of

your own.

4. Get all questions answered up front

Your contract should be specific, and may (usually should) include

drawings, model numbers of appliances or fixtures, materials specifications,

and a specification of all services which will be included. Also

the rate for upgrades or additional work (AKA change orders) should

be agreed upon. Just as important as what will be included is

a list of any required commodities that the contractor will not be

paying for such as electrical service, yard repair, owner supplied

fixtures, owners responsibilities, etc.