Managing Remodeling Finances
If you can pay for a remodeling project by writing checks out of your savings account from money you’ve actually saved up, good for you. That’s the least costly way to pay for a remodel since you won’t be paying interest on borrowed money. But if you’re like most people you’ll need a loan for some or all of the project. If you’ve got good credit and equity built up in your home you’ll be able to borrow money from a bank, credit union, or other financial institution. But be prepared to spend a little time figuring out what type of loan is best for you. There are several options and the nuances can be confusing.
Home Equity Loans and Lines
One of the most common ways to finance a remodel is through a home equity loan or home equity line of credit. Establishing a home equity line of credit essentially means that you borrow a certain amount of money at a certain interest rate, which may fluctuate. You can draw on the line of credit at any time. A home equity loan is a straightforward loan in which a financial institution loans you money at an interest rate that is generally fixed. The important point to note about home equity lines of credit and home equity loans is that they are both secured by your home. If you do not conform to the terms of your loan agreement, you could lose your home. That’s important to remember since your home is likely to be your single most valuable asset.
Financial institutions only make home equity backed loans to homeowners whose homes have equity. In other words, if you just bought your house last year with almost no money down and it has not appreciated substantially, you will likely not get a home equity loan or line of credit. If on the other hand you bought the house 10 years ago and have been paying your mortgage on time and the house has appreciated, you will likely get a home equity loan.
If you’re undertaking a very large remodel it may make sense to refinance your home and take out a construction loan. This is a bit more complicated and means, essentially, that the lender pays off your old mortgage then gives you a construction loan for the duration of the remodel. When the project is over you have a new mortgage that includes both the payoff sum of your former mortgage and the construction loan. This method of remodeling is common on big remodels but is somewhat more complex since the lender becomes a semi-active member of the remodeling team. The lender will likely want to look over your plans and check the credentials of your contractor before you start, and an inspector from the lending institution will make periodic trips to your project to make sure the work is progressing according to the plans and to the building codes. You make monthly payments to the lender just as you would for a mortgage but the loan payments increase each month as more of the loan is paid out to the contractor and the sub contractors. When the project is finished your payments become mortgage payments at either a fixed or variable interest rate, depending on your agreement with your lender.
Tips and Tricks
No matter how you’re paying for the remodel, with savings or with a loan, it’s important to keep good records. Your contractor should submit bills in a regular, orderly fashion for work already completed. If you are paying with money from your savings account or a home equity loan or line of credit, you then write the contractor checks. If you have a big refinance/construction loan with a lender, the lender will probably write the checks to the contractor after the lender’s inspectors have checked the completed work.
More tips for managing your remodeling finances:
- Determine how much money you will need for your remodel then shop around for loans.
- Be sure you fully understand the terms of the loan, line of credit, or refinance. Lenders are required to explain the terms of the loan in detail. Don’t sign anything until you fully understand it.
- You will probably end up working with a lender from your own city or area, and that’s good. You want to be sure the lender is reputable and friends and neighbors can give you suggestions about which banks and savings institutions to use.
- Keep accurate records of payments. Keep receipts. If you are writing the check to the contractor and sub contractors, do so on a regular basis, such as once a week or once every two weeks.
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- Last edited October 15 2008
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