How to Finance Your Remodel
What Is The Best Way to Finance Your Remodeling Project?
Thinking about a home remodeling project? Just one of the many important decisions a homeowner will need to make is how to finance the project. Before you get to the fun decisions like developing a wish list and gathering photos and ideas of what you would like the finished project to look like, you need to ask the tough questions including; “What can we realistically afford to invest in our home?”
No two projects are alike and every client has a different financial situation. One client may have tons of equity in their home, some have a large down payment available, another may have no down payment but may have great credit, and everything in between. Before a remodeler can make your home dreams a reality, you may want to sit down with your bank or financial professional to determine what is the best option for financing your project.
Where to Start
The best place to start is by taking a detailed look at your current financial situation.
- How’s your credit?
- What is your home currently worth?
- How much do you owe on your current home loan?
- How much value will the project add to your home?
The Loan-to-Value ratio will help a lender determine how much you can borrow. Lenders will also want to know your Debt-to-Credit ratio. These are just a few of the questions your bank, or other potential lender, can help you figure out. You don’t want to get too far down the road with plans and designs only to find out that you don’t qualify for the type of financing you are hoping to acquire.
How Much Will Your Remodeling Project Cost?
You can work with your home remodeler to determine how much your project will cost. At Hurst Design Build Remodel we have a project developer assigned to each project. We do a comprehensive professional inspection and will estimate projects down to the last gallon of paint. There are always items we cannot see until demo work begins. Unfortunately, no estimator can account for unforeseen structural issues or surprises. The most common trouble spots we find are from the home’s original construction or from prior remodeling or repair work that was done incorrectly. Therefore it may be a wise decision to add a small buffer to your project budget just in case there are unexpected expenses.
What are my Options?
Home Equity Line of Credit (HELOC) The amount you are able to borrow through a Home Equity Line of Credit is based on the amount of equity you have in your current home. The more equity you have the more you can borrow. A line of credit is much like a credit card with a very high limit. Homeowners can have the line of credit available just in case of an emergency and they will not be charged any fees or interest. Once the money is used the interest payments kick in. Interest rates are adjustable and usually tied to the prime rate. Typically it is required to pay these back over a period of 8-10 years.
Home Equity Loan - The home equity loan is essentially a second mortgage. The Home Equity Loan offers the same tax benefits of a regular mortgage. There are no closing costs. You get the entire loan upfront and pay it off over 15-30 years. The interest is fixed but the rates are typically higher than a regular mortgage.
Re-Finance Current Mortgage – Homeowners can re-finance their current mortgage and add in the cost of the remodel. This way you will only have one home mortgage to pay each month. If you currently have a low rate on your mortgage a second mortgage may be a better option.
Loans are available through banks, credit unions, brokerage houses and finance companies. The best bet is to talk to a few different lenders to get the best deal. Banks may offer the best deals to current depositors so that may be a the place to start, but it’s always a good idea to do your research. Fees may include a credit check and a home appraisal for many of these options.