Financing
a renovation
Renovating your house -- whether
it’s building an addition, giving the kitchen a facelift or
finishing the basement -- adds to your quality of life and
increases the resale value of your home. Renovations can cost
tens of thousands of dollars, and there are several financing
options available. The one you choose depends on a number of
factors:
- how much you need to borrow.
- how much equity you currently have in 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 step should be getting pre-approved by a lender so
you’ll know exactly how much you have to spend. When you talk
to contractors, give them a budget of about 10 percent less than
you’ve been approved for, in case there are additional costs
later.
Here are financing options:
- Refinancing
your mortgage is an option to consider if you’ve
already built some equity in your home and you’re planning
a major renovation. For example, if you want to borrow
$30,000 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 $150,000. 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 you’re adding something structural (as
opposed to simply redecorating) lenders may approve you
based on the projected value of your home after the project
is complete.
- A
home equity loan works much like a conventional first
mortgage. You borrow a lump sum that is secured against your
home, and the payments are amortized over several years.
Usually, the interest rate and monthly payment 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 don’t want to refinance and you need the
money for your renovation all at once.
- A
home equity line of credit (HELOC) is a good choice
if you’ll be paying for your project in stages. With this
option, the lender agrees to advance you money up to a
specified limit, and you access the money as needed with a
credit card or checkbook, 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.
- 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 tapping your
home’s equity. The drawbacks? Personal loans are not
secured with your home, so they carry a higher interest
rate. But depending on the rate, they may still be more
favorable than using a credit card. In addition, interest on
your mortgage or home equity loan may be tax deductible
whereas interest on a personal loan is not. Always consult a
tax advisor about your particular situation.
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