Story Last modified at 3:09 p.m. on Wednesday, March 14, 2007
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When a home-improvement project will cost more than you can afford to pay up front, you may consider some form of financing. However, it is as important to carefully consider all the available financing options, as it is to find the right contractor to do the actual work.
Unless you're lucky enough to have bags of cash laying around, finding the money to pay for the bathroom or kitchen remodel can be as difficult as selecting the perfect paint color or deciding between tile or hardwood floors.
Despite the challenges, local real estate agent Eva Loken said remodeling your home can be an excellent way to increase its resale value.
But it's important to choose the right type of financing.
“It's exciting to remodel your home,” Loken said. “Plus, surveys indicate that updating your kitchen and/or bathroom can often payoff handsomely at resale time.”
Creta Bloxom, Loken's transaction manager, said there are plenty of financing options.
“There are many available choices for financing a home renovation,” she continued. “However, some of them can end up costing you far more over the long run than others. So consider your options carefully.”
According to Greg Bendle, senior loan officer with Matanuska Valley Federal Credit Union, the possible sources for financing include doing it through the contractor, using credit cards, various forms of mortgages and home equity loans and standard personal loans as means to get that new kitchen, bath or adding a new deck.
Whatever option is used, Bendle advised that individuals need to, “be careful when financing any home-remodeling project to never take on more debt than you can comfortably carry.”
Michelle Weinberg, a senior staff attorney with the Alaska Legal Assistance Foundation, echoed the words of caution for those considering the financing options to complete their home improvement project.
“Whichever form of financing you choose, it is important to read all of the documents and disclosures,” she said. “You want to know exactly how much it will cost, both in terms of the up-front closing costs and the ongoing interest rate you'll pay.”
Understanding the different types of financing available will aid in selecting the one right for you and your remodeling project.
Financing through a contractor
Some contractors will offer to provide financing. Blendle suggested making sure the arrangement they are offering is as good as you can get if you were to arrange independent financing.
Shop around. Often you can get better terms and a better interest rate by going through your own lender. You also want to hire the person you think is going to do the best job for you.
“Your choice should be based upon the contractor's experience and references not financing,” Blendle said.
“While it is convenient to get your financing through the contractor, this may carry additional costs and risks,” Weinberg said. “You'll have to pay the broker's fee, typically as much as 3 percent of the loan amount, and the contractor may steer you to higher-rate loans or dishonest brokers in exchange for a portion of those fees.”
Financing through credit cards
Credit cards can be useful for purchasing small ticket items that you can afford to pay off on your monthly statement.
“While it may seem like an easy option to use credit cards to cover the cost of a home-remodeling project, they usually charge you a high rate of interest on any unpaid balance,” Blendle said. “If the project is under $10,000 in value, then credit cards might be a good option.”
Finance with a cash-out mortgage
One option for financing a remodeling project is to refinance your mortgage. A cash-out refinance is when you refinance your home for more than you owe. For example: if you owe $80,000 on a $200,000 home and wanted to borrow $20,000 for a remodeling project, you would refinance for $100,000 and get a check for $20,000.
Bendle said if interest rates on this new loan are lower than your existing mortgage or if you want to refinance your mortgage anyway, it may make sense to use a cash-out refinance for your project.
The benefits include having one monthly payment and possibly lowering your current mortgage payment, but be cautioned that the refinancing process takes a long time, and the cost effectiveness is dependent on current interest rates.
Financing through a home equity loan
A home equity loan or a second mortgage can be an excellent way to finance your remodeling project. Because it's secured against the value of your home, it usually provides a lower rate of interest than an unsecured loan and a much lower rate than you'd be charged on most credit cards.
Bendle said the interest on a home equity loan is usually tax deductible, up to a maximum of $100,000, depending on how much equity you have in your house. But he advised consulting a tax advisor to determine how much applies to your particular situation.
“We (MVFCU) recommend people seeking a home equity loan or second mortgage, not to borrow above the 75 percent of lendable equity of their home,” Bendle said. “Or 75 percent of the value of the property minus the remaining balance of the mortgage.”
Financing through a line of credit
Home equity lines of credit work much like credit cards. After a quick approval process, a lender gives you a credit card or a checkbook that you can use to borrow against your home equity. The account has an adjustable rate and is flexible in how and when you can take out money.
“This is a great option for someone planning on making upgrades over a multiple-year period,” Bendle said. “The interest is tax deductible, and the account remains open for several years.”
FHA Title 1 Home Improvement Loan
This Federal Housing Authority loan program is another option for home improvement financing offered at Matanuska Valley Credit Union. Bendle said up to $25,000 is available through this program for home improvement projects, and it is a great option for recent homebuyers.
“This program is ideal for those who don't have a lot of equity built up,” Bendle said. “It provides the financing option for those individuals to make improvements to increase the value of their home.”
Both Bendle and Bloxom encourage people to carefully examine taking on extra financial burdens to remodel a home.
“Think about what you're doing before you do it,” Bendle said. “People need to examine the impact a home improvement will have on their family and also the additional strain on the household budget. If you can afford it both financially and emotionally, go for it.”
Bloxom recommended a more cautious approach when borrowing for improvements.
“Unless you're gutting the house and starting over, one of the second mortgages and home improvement loan programs through the credit unions is the way to go,” Bloxom said. “There is no reason to refinance the full value of the home just to do a remodel.”
Bendle offered some final advice for those ready to move forward with a loan.
“The key is to look at all the fees,” he said. “Sometimes, especially with the Internet lenders, you're offered a great rate but the lender will boost things with high fees.
“Working with a local banker is usually a better option,” he continued. “The local guy will have to look you in the face every time you walk in and might see you at the grocery store. The Internet guy is long gone after your loan is processed.”
Reach the reporter at darrell.breese@alaskastar.com.
This article published in The Alaska Star on Thursday, March 15, 2007.