July 16, 2005
Finding the Money to Remodel (A Loan Primer)
The last decade has seen a boom in the home improvement industry, with millions of homeowners choosing to remodel their homes to give their families more space and comfort and to increase the value of their property. Remodeling can be an expensive prospect, though, especially if you're considering redoing a room like the kitchen (the number one most remodeled room in the house). The average kitchen remodel costs $30,000-$40,000. When you start factoring in luxury items like granite countertops, custom cabinets, and stainless steel appliances, remodeling costs can climb even higher.
So, how are so many homeowners paying for these expensive renovations? They are financing them. You have a few different ways to get the money for your home improvement loans. Here's a look at your financing options:
Home-equity loan
Home-equity loans work by using the equity you've accrued in your house for collateral. This is one way to acquire a significant loan amount with a reasonable interest rate. Also, home-equity loans are usually tax deductible on the first $100,000 of the loan principal. The maximum amount offered for home-equity loans is typically 70% to 80% of the home's value minus the outstanding mortgage.
Construction loan
Construction loans are short-term loans from a bank, where the money is paid to the builder in increments at specific points during the building process. These loans usually have 6 to 12 month terms. During the construction process, you make interest-only payments, and when the project is completed, it is paid off and replaced with a regular long-term mortgage.
Refinancing
If interest rates have lowered since you took out your mortgage, refinancing may allow you to lower your monthly payment. However, when you refinance, you may also have the option to take out a larger mortgage (that reflects the appreciated value of your home) and cash out the extra money to pay for home improvements.
Personal loans
If you don't have much home-equity built up yet, or don't like the idea of borrowing against your house, you can take out a personal loan. If you have good credit and adequate income, your bank will probably offer you an unsecured loan for between $5,000 and $25,000. Keep in mind personal loans come with higher interest rates than home-equity loans. They also tend to have shorter repayment periods and may not be tax-deductible.
Source: Home Building magazine 2005 Product Guide
