Remodel Financing
How to finance your home-remodeling project

by Laurie A. Hileman

For those of us without the spare cash to plunk down for our next home-remodeling project, financing through a local lending institution can bring us one step closer to realizing our own slice of HGTV heaven.

Before you start
Start your project off right by knowing the scope of work involved. To avoid delays with your financing, Patrick Rokosz, vice president and mortgage sales manager with Independent Bank in Saginaw Township, recommends homeowners:
•  Determine the extent of remodeling (whether updating a bathroom or adding a 20-by-20 addition)
• Research the cost of the project
• Understand the financing terms and conditions (loan amount, closing costs, fixed vs. adjustable rates, amortization term)
• Know how long it will take to complete

And before the first hammer swings, be sure to do your homework on your builder, stresses Rokosz. He recommends choosing a builder who is licensed and insured, with references and completed projects available to check.

If your building contract has allowances for items such as flooring, appliances, or countertops, try to make these selections before construction begins to make sure your loan amount is sufficient. “You may have a Formica budget but granite taste,” says Rokosz.

Financing options
Less-costly projects can usually be financed with a home equity loan while larger, more-costly projects generally need construction loan financing. Rarely, if there is a tremendous amount of equity in the home, a homeowner may choose to refinance and pull out the existing equity, using the proceeds to finance the construction.

Here’s a closer look at the benefits and drawbacks of each option.

Home Equity Loan
Pros:
• Flexible loan terms (homeowner can choose from fixed-rate, adjustable-rate, or interest-only options)
• Lower closing costs ($0 - $350)

Cons:
• Homeowner has two separate loan payments (mortgage and line of credit)
• Based on available equity in your home, which limits the amount a bank will lend you

Construction Loans
Pros:
• Appraisals are based on completed value of the home when project is finished (works well if the homeowner does not currently have a lot of equity in the home)
• Structured to handle larger projects
• Homeowner has one loan at the end of construction

Cons:
• Higher closing costs ($1,500 – $2,000) due to draw inspections

Existing Equity
Pros:
• Simple cash out refinance
• Receive one lump sum, rather than taking draws

Cons:
• Higher closing costs ($1,000 - $1,200)
• Based on existing appraisal, rather than completed value

Rokosz warns one of the biggest financing hurdles facing today’s homeowner is a lower-than-anticipated appraised value (i.e., your house isn’t worth what you hope it is). A mortgage professional can help you determine the most appropriate financing option to make your dreams come true.  

Resources:
Patrick Rokosz, Independent Bank, 989-797-2524, This e-mail address is being protected from spambots. You need JavaScript enabled to view it