Smart Buying
Remodeling That Makes Sense
The price of materials is rising, so pick your project carefully.
From Kiplinger's Personal Finance magazine, November 2005
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Financing a remodel
Deploying your home equity wisely is the key to financing a remodeling project. Interest on up to $1.1 million in debt used to rehab or purchase a house is tax-deductible.
Home-equity loan. Because you receive the loan proceeds in a lump sum and pay interest on the entire amount right from closing, these loans are best suited to one-shot proj-ects. Typically, you can borrow up to 90% of your equity for a term of ten to 15 years. Interest rates are usually fixed and run higher than rates for a first mortgage. Recently, loans to purchase a house were running about 6%, and home-equity loans averaged between 7.1% and 7.5%.
Home-equity line of credit. A line of credit is perhaps the easiest, cheapest way to borrow. The interest rate is variable and typically tied to the prime rate. If your credit rating is good, youÕ¬l pay the prime rate, currently 6.75%.
Although you can get a large line of credit, you tap the funds only as needed and pay interest only on the amount outstanding. That makes this type of financing a good choice if you plan to remodel over time.
Remodeling loan. If you donÕ´ have enough equity for a home-equity loan or line of credit, you may qualify for a specialized remodeling loan. A remodeling loan is also helpful for a project that will cost $50,000 or more because the bank adds a layer of fiscal responsibility to help you manage the loan.
Banks will approve these loans on the expected value of the home after improvements. To make sure the home actually attains that expected value, the lender will require that the builder submit a breakdown of expenses. When the work reaches certain benchmarks, such as completion of framing, the bank will approve a Ò¤raw requestÓ allowing payment to the builder. Before releasing payment, the bank sends an inspector to confirm that the work has been done.
IndyMac Bank (www.indymac.com), which makes these loans nationwide, charges a $900 fee. Its loans recently carried interest rates between 7% and 7.25%.
FHA Title I loan. If you have little or no equity and your remodeling job is relatively small, your best choice may be a Federal Housing AdministrationЩnsured loan. FHA allows loans of up to $25,000 for the basic rehab of a single-family home. For information, see www.hud.gov/improvements.