2013-02-28 20:45:02 - The process of financing your home remodeling doesn’t have to be a daunting one.
Once the scope of the project is determined and a contractor you are comfortable with is selected, it’s time to investigate the financing options ideally suited for your project and financial circumstances.
Mimi Altman, executive director of NARI of Greater Chicagoland, encourages homeowners to arm themselves with information and explore all of their options. “Financing options are indeed out there,” said Altman. “A remodeling project is a long-term investment in your home; improving its value, enjoyment and livability as well as future marketability. With lower home values and appraisals, homeowners tend to be discouraged to start the process, but it’s certainly worth investigating.”
“Financing options for a majority of projects can be broken down into basically four options”, according to John
Forssander, Mortgage Loan Originator for U.S Bank Home Mortgage in Schaumburg and longtime member of NARI of Greater Chicagoland.
“The first option is paying cash; plain and simple,” said Forssander. “While many choose this option, there are other options to consider if cash is out of the question. The current equity in your home, present home value and the size of your remodeling project may dictate which option is most appropriate. Also consider whether you will need to access that cash in the near future. ”
Altman added that most contractors offer installment payments if you are paying cash on larger jobs.
A Home Equity Line of Credit (HELOC) and a Cash-Out Refinance are two financing options that are based on the current value and current equity you have in your home today, prior to your remodeling project.
“These two options are popular with smaller scale projects, a bathroom remodel and new roof, for example,” said Forssander.
With a HELOC you’re approved for a specific amount of credit between 70% and 80% of your home’s appraised value. The HELOC is essentially a second mortgage. Lenders give you a ceiling to which you can borrow and charge interest on the amount used. This allows you to draw funds as you need them.
The Cash-Out Refinance is a convenient option that replaces your existing mortgage with a larger one to complete your project. The extra money is given to you when your loan closes, and you can use it for your remodeling project. The more home equity you have, the more cash you’re allowed to take out.
The last option, a Construction-to-Permanent-Mortgage, allows you to finance construction and a mortgage in one loan. This type of loan is based on the value of the completed project and is generally used on larger scale remodeling projects starting from $90,000 to $100,000, such as a home addition or new kitchen. The appraisal is based off of the construction contract and blueprints of the project. The lender will base this new mortgage on the completed project up to 80% to completed loan to value.
“Being able to base your financing needs on your completed or future value allows you to finance the entire project,” said Forssander. “You may be able to do a larger project since you aren’t limited to what your current equity position is.”
Based in Des Plaines, The Greater Chicagoland Chapter of NARI (www.narichicago.org) is a not-for-profit trade association founded in 1987 and currently consisting of approximately 280 member companies. NARI of Greater Chicagoland is committed exclusively to the service of the local professional remodeling industry, representing professional remodeling contractors, product manufacturers, distributors, wholesalers, trade and consumer publications, utilities and lending institutions. For more information visit us online or call at (847) 298-6212.