Financing a Remodel

This is the season when many people think about re-modeling their homes. Every home gets a year older every year.   And just like you, a little cosmetic work is called for. But every once in a while more serious work is required.

As homes age, they deteriorate a little bit every year.   Every year the sliding windows and doors are harder to open. Re-painting need to be done ever five years or so, whereas you might not need a new roof for 25 years for the date the home was built. Whatever component you consider, every home ought to have some “maintenance” money spent on it every year.

Growing families might need more room, so some owners consider adding a bedroom or two, or perhaps increasing the size of the family room. Considering the real estate commission on selling your home and buying another, you can add quite a lot of space for six percent of the value of your home!

Every so often, you need to look at your home’s re-sale potential and look at what a new buyer would want your home to look like.   Does the kitchen look modern and up-to-date?   Are the counters, cabinets, and appliances what people are looking for these days? How do the bathrooms look?   Are they appealing?

The fact is, if you were to sell your home today, a new buyer would look at those things and discount what he was willing to pay for your home based upon who much he thinks it will cost him to make the corrections after he owns it. That being the case, you’d be a lot better off doing the remodel now, enjoying the improvements while you still own the home, and then getting full value when you sell.

Having just remodeled the master bathroom, I can tell you that costs today can be a little shocking.   It seems to me that it has gone up substantially faster than the rate of inflation.   The result is that it is easy to consider a project that costs more than the cash that you have in your savings account.   So how do you finance your project?

If there is plenty of equity in the home, the easiest thing to do is to do an equityline of credit, a loan secured by a mortgage on the home so the interest is tax deductible.   These loans are also available for free or at nominal cost.   The interest rate is generally tied to prime rate and is less than 5% today if the combined loans are less than 80% of the value of your home.   Loans are available up to 100% - even 125% - of the value, although they are more expensive.

Hint: get a loan for more than you think that you’ll need, added protection just in case the job ends up costing more than you initially calculate! You have to pay interest only on the amount that you use.

If the interest rate on your current primary loan is unattractive, say over 7%, you might consider refinancing that loan and taking out enough extra to pay for your remodel.   There will be several thousand dollars of costs associated with this transaction, but you get the benefit of a lower payment, which will pay back the costs in a couple of years. One warning here.   If you are well into a 30-year loan and refinance, you go back out to the lousy end of the amortization curve. You don’t want to make payments for another 30 years so you will certainly be better off making   additional principal payments every month so as to pay the loan off just as fast as the one you currently have.

Finally, if you don’t have much equity, like you bought it recently, you can get a home improvement loan, usually from your local bank.   They will base the loan on the equity in the home after the project is completed.

Whatever way you choose, keep in mind that if you plan well, remodeling doesn’t cost, it adds to the investment value of your home.