The Financial Side of Remodeling
By John Kirkland
Courtesy of Remodel Seattle Magazine
With interest rates still near all-time lows, the timing for that remodeling project you've been putting off couldn't be better.
But exactly how you will finance the job depends on the project's scope. Simply put, the size of the job -- whether it's to replace your kitchen cabinets, or to add a second story -- will determine the most appropriate type of loan. First, ask yourself some questions: Do you plan to stay in your home for a short time or many years? Is your family growing or shrinking, and what do you need in your home to accommodate those changes? These questions can determine whether you need a new bathroom, a new bedroom or guest room, or to convert a bedroom to another use.
Once you've determined the reasons for your remodel, look for a lender who can find the right loan for your needs.
"People need to give themselves the gift of time to meet with an experienced home loan consultant," says Dave Porter, regional vice president for Countrywide Home Loans.
Although loans come in all shapes and sizes, they generally fall into two broad categories: home equity loans and new mortgages.
One of the advantages to a home equity loan or home equity line of credit is that there are few, if any, closing costs. Interest rates are likely to be higher than a mortgage, but because of the lack of closing costs, you may come out better with this kind of loan if your project is relatively small.
But with a major remodel, the advantage of lower interest rates outweighs the closing costs, thus making a new mortgage the smarter choice, Porter says.
In fact, having a new mortgage at today's rates -- one that pays off your old loan and includes the money you need for your project -- is a great way to take advantage of the current low interest rates, says Jeff Olson, assistant vice president in charge of residential construction for First Mutual Bank in Bellevue. These mortgages are called All-In-One Custom Perm Loans, and they can be written for a broad range of terms, from one-year to 30-year.
Let's say you have an 8 percent mortgage on $100,000, and you want to borrow an additional $80,000 for a remodel. You could get a home equity loan for $80,000 at 9 percent, or get an All-In-One Custom Perm loan for 180,000 at 7 percent. The second option would save you about $180 per month, Olson says.
One of the first steps your lender will make is deciding if you qualify for the higher mortgage. Lenders use a variety of criteria, including your credit rating, your income, the amount of debt you are already carrying, your job stability and your cash reserves.
Once that screening is completed, your lender will appraise your home to compare its current value to the amount it will be worth as a result of your remodeling project, according to Andy Futrell, regional builder sales manager for Wells Fargo Home Mortgage in Bellevue.
"As long as the appraisal report states that the value is worth the loan, we'll lend the money," says Futrell.
Will the project you have in mind add value to your home?
Projects that add the most value are those that add living space, functionality, or light. Kitchen and bathroom projects are among the most popular, not only because they greatly improve quality of life, but because they enhance the home's value at resale time.
Bottom line: talk to a lender who knows the different loan choices and has insight on the value created by remodeling. Once you've gone through this process, you're well on your way to turning your dream home into a reality.