Paying for the Remodeling
By Kristi Vaughan
The design is set, the materials selected and the contractor chosen. Now, how are you going to pay for this remodeling?
Homeowners embarking on remodeling projects have several options for financing the work. The option you choose often depends on the scope of the project and your personal finances.
Smaller projects, and those for which you have been saving for years, often can be paid for in cash. Larger projects probably will involve some type of financing agreement.
Home equity
A common method of financing a renovation is using the equity you have built up in your house already. Equity is the monetary difference between the amount still owed on your mortgage and the price you could receive if your house was sold today. Thus, if you owe, $100,000 on a house that has a market value of $300,000, you have $200,000 in equity. Most banks allow you to borrow an amount equal to 75 to 80 percent of the equity in your home.
Home equity loans are offered through lines of credit, with variable interest rates, or through fixed-rate, fixed term loans sometimes referred to as second mortgages. Because you borrow only what you need when you actually need it, lines of credit can be more flexible than fixed-sum second mortgages. The latter, however, can provide more control over excess spending since the dollar amount borrowed is set in advance. Your bank can give you more information on home equity lines as well as current rates.
Refinancing
Another alternative is to refinance your entire mortgage to a higher amount. The amount borrowed would reflect the original amount plus the cost of improvements minus the principal you already have paid. As with the original mortgage you will need to hire an attorney and go through a closing. You also will have to pay closing costs including bank fees. If you are considering refinancing, shop around for the best rate but also ask the bank that currently holds your mortgage about favorable terms for retaining your business.
Contractor and manufacturer financing
Some contractors and materials or equipment manufacturers offer financing arrangements, at least for their portion of a project. While this method can be convenient, interest rates can be higher than those you would pay through a home equity loan or a refinancing. The same consideration about interest rates would apply to use of credit cards to purchase materials or appliances.
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