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Thursday, Sept. 20, 2012 09:24 pm

Financing a home improvement project

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After years of funny financing and few limitations on loans, banks and other lenders have tightened up their lending policies. As a result, homeowners considering a home improvement project might need to look elsewhere to secure financing.

There are no certainties in the real estate markets. Though statistics suggest marked improvement in home sales over just a few months ago, many homeowners remain leery about selling their home to try to move up to something bigger and better. The National Association of Home Builders says many people are choosing to stay put in their homes and remodel or make renovations to transform the house into something more comfortable.

While there are many worthwhile home renovation projects, the NAHB recommends projects that bring your home up to par with neighbors’ homes. It doesn’t pay to transform your home into the most expensive on the street – unless you plan to live there for the rest of your life. Real estate experts recommend that a remodeling investment increases the value of your house by no more than 10 to 15 percent above the median sales price in your neighborhood.

When it comes time to finance a remodel or renovation, you may not know where to start. Credit restrictions on home mortgages that have troubled many would-be buyers have also plagued individuals looking to finance home improvements. However, homeowners hoping to finance a project do have options, and not all of them require stellar credit ratings.

• Borrow against a retirement plan. Many retirement plans, such as a 401(k), allow plan members to take out a portion of the savings to put toward a home loan. This does not mean you are taking money out of the account permanently. Rather, you are borrowing against yourself, with repayment necessary in a certain timeframe.

Because these loans often offer very low interest rates, and essentially the interest is being paid back to you, they might be a good option for men and women who cannot secure a traditional loan. However, if you have been laid off, there may be a shorter repayment period. Also, the interest on these loans is not tax-deductible.

• Borrow against other investments. CDs, bonds or mutual funds can provide the collateral you need and earn you a lower interest rate. Fixed-income investments are more stable options to borrow against, as their value won’t have a chance to decline.

• Apply for a home equity loan. Many people have heard of a home equity loan, and it is usually the first choice when borrowing funds for renovations. Essentially a home equity loan is taking out a second mortgage on your home to pay for the work you want to have done, which is based on the equity, or the difference between the home’s fair market value and the outstanding balance of all liens on the property. The interest on these loans is tax-deductible, which can make this financing option quite popular.

• Secure a home equity line of credit. A home equity line of credit, or HELOC, is another type of home equity loan. Instead of receiving a lump sum to use toward renovations like you would with a traditional home equity loan, a HELOC is sort of a credit card-type scenario based on the equity in your home. You are given a line of credit, against which you can buy items. This is good for intermittent needs, when one large sum is not needed. HELOCs have a draw period, during which the borrower can use the credit, and a repayment period, during which it must be repaid. HELOCs generally have lower mortgage fees at the start and are generally subject to the same tax incentives as regular home equity loans.

• Consider refinancing. Interest rates on mortgages are at historic lows. You may qualify to do a cash-out refinance, where you borrow against the value of your home and create an entirely new mortgage at the lower rate. Although you will start your mortgage all over from day one and have to pay closing fees, this type of refinancing can be more advantageous to homeowners with significant equity in their homes.

• Apply for a government-sponsored loan. The government may offer programs aimed at helping individuals who are underwater on their home loans borrow money to make necessary improvements. While the funding cannot be used to purchase luxury items, such as a swimming pool, it can be used for necessities.

Residents of the United States can explore FHA 203(k) refinance options and an FHA title 1 improvement loan.

• %u2008Discuss financing with your contractor. Some contractors may offer financing. Keep in mind that the interest rates may be high, and it may be difficult to investigate the security of these types of loans.

Many homeowners also look to credit cards to help finance some home renovation projects, but they should be used as a last resort. Credit cards typically come with high interest rates, and while they are good for some small projects, financing larger projects on a card may land you deep in debt.

Homeowners who choose to stay in their homes and make renovations have a host of options at their disposal to finance those projects.

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