Home Improvement Financing
Need to renovate? Looking for financing for renovations? What my options if you need to make renovations and do not have the money in the bank?
Renovating your home can increase property value. However, finding the money to renovate can be a challenge. It can be easy to make decisions based on emotion rather that objective financial reasoning. What are the options?
Major Credit Cards
Credit cards can provide funding for a small project. However, it quickly becomes one of the most costly ways to finance your renovation unless you are sure you will be able to pay when the monthly statement arrives.
Most furniture and home improvement stores offer zero-percent interest credit cards, if the balance is paid within one year. This can be risky.
The advantages of points or rewards for using credit cards are quickly offset if you are not able to pay promptly. Ensuring you have back-up or alternate financing to refinance the balance accrued on your credit cards is an alternative that should be explored before making large purchases on credit cards, especially the higher rate interest cards offered by stores.
Store-specific credit cards also inhibit your ability to shop for the best price. Most people spend more on purchases made on credit cards than on the same products when using money in a bank account. When loan money is in a bank account, it seems to increase awareness of the amount of money being spent.
Line of Credit
The advantages are that the rate is lower than credit card interest, and you are only paying interest on the outstanding balance, as you would be on a traditional loan. Lines of credit are revolving loans enabling you to do part of a project, pay it off, and then do another part of your project. You only pay interest on the outstanding balance. Homeowners can get an unsecured line of credit if their credit rating is excellent. This can be an option for smaller renovation projects. Unsecured lines of credit often range from $10 – 15K.
Home Equity Line of Credit
A home equity line of credit is like a line of credit, except it is secured with your home. Usually the rates are variable and higher than what you would pay for a second mortgage. The advantage is that you can pay it off at anytime, where a second mortgage is a commitment that spans several years. The bank will want the security if the amount needed exceeds the amount they are willing to lend on an unsecured basis. Depending on the size of the project and your debt ratio, the second mortgage may be preferable.
Most lines of credit are on a variable interest rate and interest rates may climb while you are trying to pay it off. Home equity lines of credit generally require as much paperwork as a full refinance or a second mortgage. If you already have a relationship with the bank offering the line of credit, the bank may waive any fees associated with opening it.
Home Equity Loan
A home equity loan is a second mortgage. It offers a fixed rate, like a traditional mortgage. The rate you’ll be offered is typically higher than it would be for a first mortgage. Depending on the term of your first mortgage and related penalties, it can be more effective to refinance the first mortgage.
On the other hand, expense of a second mortgage is not nearly as involved as for a full refinance.
No matter what financing method you use, it is imperative that you accurately budget for the project and prepare for unexpected expenses. It is easy to be critical of governments when they overrun their budgets – there is no one else to blame when we do it to ourselves.
Reverse Mortgage (source: Wikipedia)
A reverse mortgage has long been considered a loan of last resort because of its high fees. A reverse mortgage (or lifetime mortgage) is a loan available to seniors aged 62 or older, per HUD, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves, they can be out of the home for up to 364 consecutive days. (e.g., into aged care).
In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term the mortgage has been paid in full and the property is released from the lender and becomes fully and solely owned by the homeowner. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. In certain countries (including the United States), however, a reverse mortgage must be the only mortgage on the property.[citation needed] Most lenders put a lien of close to 300% of the amount funded in the transaction, so very rarely do they allow a “refi” type event to “capture” more equity. It is generally a one time event. The lender will require the loan satisfied and paid in full before they will offer a loan somewhere else. You will have to be in good standing with HUD as well.
