real estate

6 Things You Must Know About Home Remodeling

Before you start the project, figure out how you will pay for it.

1. Make a plan. If you're thinking of renovating your home, start by talking with remodelers and lenders to figure out whether your ideas are financially feasible. How much will you pay out of pocket? How much will you need to borrow? You could pay with a credit card, but that's probably your most expensive option. Home-equity borrowing makes the most sense for larger projects. You can generally borrow up to 80% of the appraised value of your home (that amount includes all housing debt). Once you sign a contract, the remodeler will require a down payment, with additional payments due at specified intervals.

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2. A refi could make sense. If you haven't locked in a super-low interest rate, you could refinance your mortgage and take out cash. In late June, the average 30-year fixed rate nationally was 3.5%, according to Freddie Mac; you'll pay a somewhat higher rate on a cash-out refi. If you have enough equity, you can roll the closing costs (about 1.5% to 3% of the loan amount, on average) into the loan. Allow about 45 days to close.

3. Take a lump sum. Home-equity loans are fixed-rate loans that you repay in equal monthly payments over a term of five to 20 years. They are best for onetime projects, such as replacing the roof or the heating and air-conditioning system. In late June, the average rate nationally was 6.1%. But lenders are increasingly reluctant to offer home-equity loans because of regulations resulting from the Dodd-Frank financial reform, says Keith Gumbinger, of HSH.com.

4. Open a home-equity line of credit. It's easier to get a HELOC, which you tap when you need the money. You'll pay a variable rate of interest only on the amount you withdraw. You can usually make interest-only payments for 10 years, after which you must repay principal and interest. In late June, the average variable rate was 5.5% nationally. If rates head higher, you may be able to repay portions of your credit line at a fixed rate over a fixed term. You can close on the line in about 30 days, and your only costs may be for a credit check and appraisal. You can use the line after you complete your project, but watch out for a penalty if you pay it off within three years.

5. Take out a construction loan. If you're planning to completely renovate your present home or build a new one, a construction loan will maximize your borrowing power because the lender will generally lend against the appraised future value of the home. You may be able to lock in your interest rate during the period allowed for construction (from six to 18 months, depending on the lender); during that time, you'll make interest-only payments on the amount disbursed. When construction is complete, the loan will convert to a permanent mortgage. Depending on the lender, you can get a fixed or variable rate. EverBank recently offered a rate of 3.1% to borrowers with the best credit for a 5/1 ARM of $250,000, with a 12-month construction period.

6. Pay cash and ask for a discount. Loren Schirber, a remodeler in the Twin Cities area, offers clients a discount of 2.5% of the project price if they pay in cash instead of with a credit card. If your builder doesn't offer a discount up front, ask for one.

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