Question: We would like to refinance our home to provide funds for remodeling. What are our options for financing?
Answer: There are a couple of options when considering financing to provide funds for remodeling. If you have been planning this for some time, you may have set aside cash to fund the project.
If so, congratulations! You will save a significant amount by not having to pay interest. However, most homeowners do not have the kind of cash on hand to pay for a sizable remodel.
Most of the homeowners we know use traditional cash out refinancing loan or a construction loan.
Home equity loan: If you don’t have the cash on hand, consider a home equity loan, also known as a second mortgage. Most lenders will lend up to 90% of the current value.
That means you’ll need to have 10% equity in your home. An appraisal is performed to determine the amount a homeowner is eligible to borrow.
The difference between the appraisal of the home and the balance on your mortgage determines the amount that can be borrowed.
The advantages to this type of loan are that the interest rate is tax-deductible, and the interest rate is lower than other personal unsecured loans. However, the interest rate on a Home Equity Loan is generally higher than your first mortgage due to more risk to the lender.
In the event of default, the first mortgage gets priority. Still, they are popular loans as the borrower can use the money as he chooses.
Construction loan: These are less common and a bit more complicated. To get started, a two-tiered appraisal is performed at the request of the lender. One is called an “as is” appraisal accessing the current value of the home.
The “subject to” appraisal is an analysis of what the home will be worth after the project is done.
You can expect the lender to analyze the project to make sure the improvements are correctly supported by the appraisal future value. The contractor will be investigated to make sure their subcontractor paying habits are positive.
Of course, you don’t want folks doing major projects on your home unless they are licensed, bonded and insured. Some lenders will allow you to do the work yourself as long as those supervising the project have the required experience.
The choice of contractors ultimately rests on the homeowner. Check out Rosie’s How To Choose A Contractor Consumer Guide.
Q: Is now a good time to borrow?
A: Yes, according to Rosie on the House Certified Partner Randy Hotchkiss of Hotchkiss Financial in Tucson. There are several factors that contribute to successful lending at this time:
- Interest rates continue to be very attractive with 30-year fixed rate slightly below 4%. Fifteen-year rates are at 3.5%
- There are financing options available for self-employed buyers who do not show enough net tax return income to qualify. These non-QM (qualified mortgage) financing options consider bank statement balances and other liquid investments to qualify based on available sources for debt service. Excellent credit history is also heavily considered.
- With easing of the regulations imposed after the 2008 housing meltdown by the Consumer Finance Protection Bureau community banks and smaller institutions have been able to enter the real estate lending market again.
Q: What are some other things to consider?
- Instead of borrowing money, negotiate a smaller down payment on the home and use the money saved to complete the work.
- When considering a fixer-upper, do your homework. Depending on the interest rate, you might get more for your money moving into a move-in ready home. The advantage to remodeling, of course, is that you get to personalize the finishes in your home.
- With the easing of the regulations imposed after the 2008 housing meltdown by the Consumer Finance Protection Bureau, community banks are in the real estate financing business again.
Q: Is there an easy way to keep track of the value of my home?
A: The HomeZada App has a financial tracking system that, among many other features, makes tracking the equity in your home easier.
If you used to balance your checkbook with a pen and a piece of paper and then converted to Quickbooks, then you understand how much HomeZada can simplify this task.
