How to Finance your Remodel or Addition

Homeowners often dream of a new kitchen, home addition or master bath remodel, but put it off because they think financing is beyond their reach. What they may not realize is there are a number of ways to finance a home renovation other than the traditional home equity loan. By choosing an affordable financing method, homeowners can improve their home – and the value of their home – for a reasonable monthly cost.

First steps to financing your construction project

Before meeting with a lender, determine the scope of the project and get an estimate on the cost – then add 10 percent for cost overruns. If you are doing the work yourself, make a comprehensive list of all materials and permit fees. Add 20 to 30 percent on top of that for unexpected problems and cost overruns. Remember to factor in the schedule and estimated time of completion. If the project will take a few months to complete, that could influence your financing decisions.

What are the financing options?

A home equity mortgage has long been a reliable means for homeowners to fund large improvement projects. By working with your bank or credit union, you can borrow money against the balance of your home’s equity, paying it off over 15 to 30 years in some cases. These loans are tax deductible and carry a fixed interest rate, but that rate is usually higher than a conventional mortgage.

A home equity line of credit is a flexible option for lengthy renovations and DIY projects. These loans work like credit cards, where a lender provides a loan and homeowners can borrow multiple times up to the total value of the loan, paying back what they borrowed typically over 8 to 10 years. Before signing on to a home equity line of credit, make sure to review the APR, closing costs and other loan details carefully, as some lenders market low-cost lines of credit only to increase interest rates or add fees to the overall cost later.

FHA 203(k) mortgages are federally-insured loans that allow homeowners to simultaneously refinance their first mortgage while combine it with the improvement costs into a new mortgage. These loans base the amount a homeowner is able to borrow on the value of the home after improvements, allowing homeowners to borrow more than they would be able to with a traditional home equity loan. However, these loan limits tend to be low and can vary depending on where you live.

Borrowing from a 401(k) is another option, especially for homeowners with a few years of work savings under their belts. Both the money borrowed from a 401(k) and the interest are repaid to you, instead of a bank. Some financial experts aren’t keen on this because it removes money from a retirement savings account, instead of letting it grow. These loans are typically repaid in 5 years, but if a homeowner changes jobs or loses a job, the loan may need to be repaid in 90 days or the owner could face early withdrawal penalties.

A diverse approach to financing a project

For some homeowners, the money to pay for a renovation might come partially from savings, partially from a line of credit and partially from another source. Funding a home repair with a variety of sources can reduce your overall debt.

If you have questions about the cost of a home renovation or addition, Dube Plus Construction can answer your questions. Give us a call today.