Money Matters

The most important decision you make when planning a home renovation won’t be what kind of countertops to choose or what color to paint the family room—it will be how to finance the project.

Do you tap into your savings, borrow from your 401(k) or take out a loan? Does it even make sense to spend money upgrading your home when values have been declining? Actually, the answer is: It depends on your circumstances.

For instance, if you owe more on the house than what it’s worth, experts say it may not make sense to remodel. But if you own a home with equity and you want to improve its value, or if you’ve found a great deal on a distressed property in a good neighborhood, now could be a good time to explore financing options.

In fact, now may be the best time to buy if you don’t mind renovating, say some experts. Mortgage rates are low and inventory for distressed properties—some of which will need at least minor repairs—is high in the Tampa">Tampa Bay area right now.

“These distressed prices create enormous opportunity for people,” says Greg Quick, senior vice president, chief operations officer for HomeBanc’s mortgage division. “And the time to snap them up may be now. As the economy recovers, you’re going to see property values recover.”

In fact, the housing market may already be starting its comeback, Quick says, because lenders are starting to see multiple offers on some properties.

“Prices on properties, home loans and building materials are all low right now,” Quick adds. “And you may not see this type of opportunity again, with remodelers being willing to work a little cheaper right now. When you put the whole value package together, it’s hard to imagine that it’s going to get much better.”

Still, says Quick, don’t make a decision until you have a true picture of the home’s condition and accurate estimates from reputable contractors on what repair and renovation costs will be.

“You need moxie to handle a remodel yourself, and most people don’t have those kind of skills,” says Tampa">Tampa Bay Realtor Barbara Jordan, who works with Coldwell Banker.

Jordon advises would-be buyers to investigate programs that combine the purchase price and the cost of remodeling into one loan, such as the Wells Fargo Purchase & Renovate Program.

The amount the homeowner can borrow is based on the increased value of the home after improvements are made—and the interest on the cost of the improvements could be tax-deductible.

“You need a mortgage lender who knows the mortgage business and understands people,” Jordon says. “And you also need a general contractor who’s reputable. There’s a lot of hungry people out there nowadays who are not proficient at what they do.”

The best way to find a reputable remodeler is through the local home builders association. In Tampa">Tampa, the Tampa">Tampa Bay Builders Association (TBBA) has an active Remodelers Council.

Getting a loan, of course, isn’t as easy as it once was. Guidelines are tougher and every loan has to be audited before it closes. Therefore, expect the loan process to take longer than it did a few years ago.

Before you close on your loan, you’ll need to work with your remodeler to create a draw schedule. A construction draw is an agreement between the homeowner, the builder and the lender that clarifies when and how payments will be made during the remodeling project.

After each stage of construction, the lender inspects the work and releases funds for the next stage. The check is made payable 
either to the builder or to the builder and homeowner.

Most experts say borrowing 
from your retirement savings or using credit cards isn’t the best 
way to go when financing a re-modeling project—especially when loan rates are so low. Here are some of the most popular financing options:

> Home equity loan/second mortgage. A home-equity loan can get you a lump sum of cash at a fixed interest rate with a payback period of, say, five years. This loan—
also known as a second mortgage—
is based on the amount of equity in your home.

> Cash-out refinancing. If you have enough home equity and/or you have a small project, you also 
can “cash out” or take out a new mortgage that will pay off your existing mortgage as well as fund-
ing the remodeling project. Re-financing your mortgage could be a smart move if interest rates are lower today than when you bought your home.

However, some homeowners—especially those who purchased a year or two ago at the peak of the boom—have found to their chagrin that the equity they thought they had has diminished or vanished.

Still, while the decline in home values seems drastic because it has occurred over a short period of time, the bigger picture isn’t nearly as dire. If you’ve lived in your home eight or ten years, it’s likely worth more—perhaps considerably more—than you paid for it despite recent price drops.

> Home equity line of credit. A home equity line of credit is a form of revolving credit that uses your home as collateral. You can use some or all of the money available whenever you need it. The credit line often is set at about 80 percent of the home’s appraised value minus the balance of the mortgage. But the amount of credit available to you will also depend on your credit history and your ability to repay the money.

> Cash. If you’ve got cash and you feel good about improving the value of your home, it’s certainly an option.

Compare the interest rate on a loan you’d get if you choose to finance your renovation to the interest you’d be earning if you invested the money instead. Which makes the most sense?

Although it’s a good time to borrow because interest rates are low, it’s also a more difficult time 
to borrow because of tightened standards. “Because the lending market has become much more restrictive, your options for loans have been diminished,” notes Quick. 
“So you have to determine if you can get a loan in the first place.”

One more thing to consider: Interest payments on a home improvement loan may be tax-deductible

> Federal Housing Administration loans. FHA offers the Section 203(k) program, which is for more extensive rehabilitation projects, and the 203(k) Streamline Limited Repair program, which is for less extensive repairs.

The Streamline program allows you to finance an additional $35,000 into your mortgage to improve your home before moving in.

To take advantage of these programs, the property value must remain within the FHA mortgage limit for the area once the rehabilitation or repairs have been com-
pleted and you must use an FHA-
approved lending institution. Many—
but not all—mortgage lenders are approved to make loans through this program.

“You can buy a house understanding that it needs renovations and they’ll incorporate the cost into the loan,” says Tampa">Tampa Bay re-modeler Guy Pearson. “It’s good for short sales and foreclosures and things like that.”

> U.S. Department of Agriculture Rural Housing Loan. The rural development loan program, which is guaranteed by USDA, allows you to buy an owner-occupied home with 100 percent financing on a market-rate, 30-year fixed mortgage with no mortgage insurance requirements.

The home must be in an eligible area—no highly populated cities—and your income can’t exceed guidelines set for the area. But closing costs may be rolled in if the appraised value exceeds the contract amount.

The bottom line: If remodeling does make sense for you, find a lender and a contractor you can trust, says Quick. “Don’t make the mistake of trusting a stranger who places a flyer on your door or an ad on the Internet.”

Tips 
from local 
experts:
> Get your remodeling plans approved by your homeowners association, the zoning board or anyone else who legally gets a say. Make sure your contractor gets the proper building permits.
> Get bids from several contractors. Ask for references. And before you sign a contract, verify that the contractor has a current license as well as liability and worker’s compensation insurance policies.
> Don’t overspend for your neighborhood or you won’t recover the cost of the remodel at resale.
> Decide on a budget and keep 20 percent of the money in reserve for any extra unplanned costs.