Finding funding may be a project itself, depending on the scope of your home improvement plans, For smaller projects, you may be able to save for it from your regular household budget. But for major projects, you will probably need financing. It may be possible to borrow against the cash value of your life insurance policy. Talk to your life insurance agent for information about this option.
Contact your bank, savings and loan, or credit union for information about home improvement loans. Compare interest rates, repayment options, and penalties from a few lending institutions before selecting one of the following options:
Second mortgage: A second mortgage is loan against the equity in your home, in effect, an additional mortgage. Typically, financial institutions let you borrow up to 80% of the appraised value of your home, less the balance on your original mortgage. For example, if your home is appraised at $100,000 and your current mortgage balance is $70,000, you may be able to obtain $10,000 by a second mortgage. You may also have to pay all the fees normally associated with a mortgage, including closing costs, title insurance, and any fees. Your tax advisor can tell you if the interest on a second mortgage is tax-deductible.
Refinancing: This option pays off your current loan and takes out a new mortgage on your home. Generally, you'll need to have equity in your home, a solid credit rating, and a steady income. Again, you'll incur all the closing costs that you'd pay on a new mortgage. Unless your remodelling project is extensive and you can get an interest rate at least two points less than you currently pay, refinancing may not be a good choice for you.
Home Equity Line of Credit: A home equity loan-like a second mortgage-lets you tap into up to about 80% percent of the appraised value of your home, minus your current mortgage balance. Since it's set up as a line of credit, you won't have any interest charges until you make a withdrawal, but you will pay closing costs. You can make withdrawals as needed when you start paying contractors and suppliers. The interest rate is usually variable and may be based on the outstanding balance.
Make sure you thoroughly understand the terms of the loan. For example, if your loan stipulates that you need to pay interest only for the life of the loan, you'll have to pay back the full amount borrowed at the end of the loan period or you could lose your home. Ask your tax advisor if the interest on a home equity loan is deductible.
Unsecured Loan: Although the interest rates on unsecured loans are frequently higher and you generally won't get a tax deduction for the interest you pay, the costs of obtaining an unsecured loan are usually lower. And the relative ease of getting this kind of loan may make it a good choice for small projects of $10,000 or less. The lender will evaluate your application based on your credit history and income.
You'll be happier with the outcome of your home improvement project if you plan carefully and do your homework. The information in this article and a realistic idea of your needs and budget will help you make your home closer to your dream of perfection.