Category Archives: Home Owner Tips

Protect Yourself Legally

There are many legal and protective measures you should take during a remodeling project. The best protective measure you can take is to always get everything in writing and keep a copy in your files. Every time an agreement is made, you should have a written confirmation. This means a contract at the beginning and written change orders, work directives, or confirmation letters when the scope of the project is altered in any way. Continue reading

SBA Loans for Homeowners

When disaster strikes, who helps communities pick up the pieces and rebuild? The U.S. Small Business Administration (SBA) plays a major role in assisting individuals and businesses after hurricanes, civil disturbances, earthquakes, floods, fires and other catastrophes. Don’t let the name confuse you—the SBA disaster loans are not for small businesses only. They help homeowners, renters, owners of businesses of all sizes and nonprofit organizations repair damaged property, giving disaster-ravaged economies a boost. Continue reading

Budget Busters

There are two main reasons for busted budgets: changes and “whileyas” (that handy little phrase that often spills out of a homeowner’s mouth, “While you’re here, could you just…”).

Here is how to handle both:

  • Determine how changes will be handled before the project starts and include the procedure in the contract. This will help keep change orders to a minimum.
  • Realize that any work not specified in the original contract will have an additional cost attached to it. Contractors find that “whileyas,” can represent up to 10 percent of their total annual volume. If you do find additional work you would like your contractor to do, by all means discuss it with him or her. However, you should approach the “whileya” job as a new project and ask for the contractor to draft another project plan and contract for that particular job. This will prevent you from making an uninformed decision, and also give you time to carefully consider the new project.
  • Remodeling often has a domino effect which causes “Whileyas” to happen: You see one room being transformed and decide that the room next to it doesn’t match anymore. Next thing you know, the hallway looks dingy and needs some fixing of its own. And so it goes throughout the house. This phenomenon can turn into an enormous budget buster if not kept under control.
  • Finally, stick to your original plan. If you decide that your budget is “x” and your reserve fund is “y,” tell your contractor to work within those figures. It is easy to say, “A little more on this faucet won’t matter. It’s a small amount of money.” Unfortunately, this is a close cousin to “whileya” and another easy way to overextend your budget.

Maintaining Your Budget

  • Keep the cost of your remodeling project in perspective. According to the American Homeowners Foundation, moving to a new home typically costs 8-10 percent of the current value of your home. On a $150,000 home, this cost is $12,000-$15,000; this is simply what it will cost to move. This is a good base figure for beginning to establish your remodeling budget. A good number of remodeling projects can be done for the money spent in relocation, and remodeling will add value to your current home as well.
  • How much remodeling could you do for 8-10 percent of the current value of your home? How much work would you have to do in a new home should you decide to move? If you completed the finance worksheet, you know how much you can spend-but how much should you spend? The answer varies by circumstance. You should spend as much as is necessary to create your dream home if you are staying in the home for a long time and can afford to do so. However, if you are planning on moving in the near future (within 3 years), be sure to remodel within the standards for the homes in your particular neighborhood.
  • Once you determine how much you can afford to spend on a remodeling project, decrease that amount by 10-20 percent. This money should be put in a reserve account to cover any change orders or incidental charges accrued along the way, which will prevent a frantic scramble for additional funds at the end of a project. You also might want new furniture, new curtains, etc., when the project is complete.
  • Remember that your choice in products will determine the cost of the project. There are many different levels of product quality as well as price ranges. Talk to your contractor about various options to meet your overall goal.
  • Project cost will vary depending on your location, the size of the room, and what features or options you choose. Your best bet for establishing and meeting a realistic budget is to hire a professional remodeling contractor. Your contractor should be familiar with many of the financing options available and be able to help you arrange the financing you need. Many are often linked with a lending institution and can act as an intermediary to obtain financing for you. This offers you convenience and a third party interest in the project’s success.

Whose Money to Use

Types of Financing Available

There are many ways to obtain financing for your home improvement project. Here are just a few (in order of popularity):

Home Equity Loans
These are the most popular loans for home remodeling. They are tied to the equity in your home and may be tax deductible. Most are available at competitive interest rates. There are two types of home equity loans: line of credit and lump sum. In a line of credit loan, you and your lender set a maximum amount of money that you can draw upon during the course of your project. This allows you the flexibility of withdrawals. You can make your withdrawals as needed, and you are only obligated to repay the amount of money you withdraw, plus interest. However, be aware that the interest rates on line of credit loans are frequently pegged to the prime rate and can change any time prime changes, or even more frequently. A lump sum or installment loan is a one-time lump sum withdrawal of a set amount, which you repay in monthly increments usually with a fixed interest rate. The sum is based on the equity you have in your home. Equity is the value of your home minus the outstanding balance on any mortgages. The amount of equity required depends on the particular lender program.
WARNING: If you cannot repay a home equity loan, you could end up losing your house.

When you refinance your home, you are in effect obtaining a larger mortgage to pay off your existing mortgage. The excess funds can be used to finance your home improvements. The big drawback is that refinancing often costs between 3-5 percent of the loan amount and can take as long as getting approval for a first mortgage. This type of financing only makes sense if you were already planning to refinance your home or if you can obtain a much lower interest rate than you are currently paying.

No Equity Loans
Some lending institutions offer loans to homeowners who do not have sufficient equity in their homes to get a home equity loan. No equity loans offer a range of benefits and loan amounts and can work as a consolidation loan to lower your overall debt. The big benefit is that these loans usually are tax deductible.

FHA Loans
The Federal Housing Administration (FHA) began Title I financing for property improvements under the National Housing Act of 1934, a program that is still available today. The FHA makes it easier for consumers to obtain affordable home improvement loans by allowing loans up to $25,000 without any equity in the home.

Margin Loans
Loans against securities you own are the next cheapest source of funds after home equity and no equity loans. With a margin loan, some brokers will let you borrow up to 50 percent of the value of your stocks and up to 90 percent on U.S. Treasury securities. The interest rates are also competitive. In addition, you may deduct the interest against investment income (but not against ordinary earned income). WARNING: There is a risk attached to these loans-if your stocks go down in value, you will be called upon to deposit more money into your account (known as a margin call). If you cannot come up with the money, you will be forced to sell your stocks when the market is low.

Personal Loans
There are many types of personal loans available: debt consolidation; unsecured lines of credit based on your earning capacity or net worth; and lines of credit secured by a possession, such as a car or a savings account. The interest rates for personal loans depend on the borrower’s credit and what is used for collateral. For example, loans using savings accounts as collateral may be priced as low as 2 percent above the savings/CD rate.
WARNING: Remember that accounts used as collateral will not be available for other purposes.

Loans from Retirement Plans
You may be able to borrow against a defined-contribution retirement plan, such as a 401(k) or company profit-sharing plan, depending on where you work. The availability and terms of these types of loans will vary from employer to employer. Usually, if a company allows these loans, you can borrow up to half of your vested balance or $50,000, whichever is less. You will be required to repay the loan in full within five years or if you terminate your employment. The interest on these loans is not tax deductible. WARNING: There are significant IRS restrictions on these types of loans. If you do not follow the rules and restrictions, you may be faced with a 10 percent penalty fee, plus income taxes on the money you borrow.

Life Insurance
If you have a whole-life or other cash value insurance policy, you can borrow against that policy. The death benefit will be reduced by the amount of the loan. If you die before the loan is repaid, your heirs will receive the face value of the policy less the outstanding loan balance.

Credit Card Loans
These are as quick and easy as visiting your local bank. Your credit card will determine the amount of money you can borrow and what interest rate you will be charged.
WARNING: As easy as this is, it is one of the most expensive ways to borrow and should only be used if you need money quickly and plan on repaying the loan just as quickly. The interest rate charged is usually quite high.

Budgets 101

Money: the one thing that causes more disagreements and stress than just about any other entity. Luckily, creating a budget for your home improvement project does not need to be intimidating or cause World War III in your living room. Just take this simple crash course in everything you need to know about remodeling finance:

How Much Can You Afford?

This question alone is enough to strike fear into anyone’s heart. The truth is not many people enjoy establishing a remodeling budget-and many just don’t. Many homeowners prefer to call a remodeling contractor and expect him or her to create the budget for them, which is not the best way to begin. How do you start off right? You can begin by taking these four easy steps in the right direction:

Step One: Decide how long you plan on staying in your home. The length of time you intend to stay in a home will affect how much money you should invest in it. If you are going to stay in the home for more than ten years, you should spend as much as you are able to create the home of your dreams. However, if you are planning on moving in the near future, you should take care not to over-build for your neighborhood. Look into the real estate comparisons for your area and keep your investment in line with the average home sales price. You don’t want to invest thousands of dollars you won’t be able to recoup at closing.

Step Two: Make a list of all your debts. You should include any debts you pay on a monthly basis, such as mortgages, car loans, credit cards, and any other items with a fixed monthly payment. This list should not include payments for groceries, utilities, telephone services, or other general expenses. Call this list your monthly expenses.

Step Three: Determine your total gross monthly income. Include all sources of income that you would list on a loan application.

Step Four: Complete the following worksheet to determine how much you can afford to pay for your remodeling project on a monthly basis. These formulas are used when the remodeling project is going to be financed. Warning: Cash is not always the best option!

Calculations 101

Lenders use a simple Debt-to-Income (DTI) ratio to determine if a homeowner can afford the additional debt of a remodeling project.

Enter Your Total Monthly Expenses $ __________________
Add the Estimated Monthly Payment for the Remodeling
Project + $ __________________
Total = $ __________________
Divide the Total by Your Gross Monthly Income … $ __________________
DTI % = __________________

Each lender will approve loans at a specific DTI percentage (most lenders will tell you what their set DTI ratio is, if you ask). For example, if the lender accepts DTI ratios of 45 percent and your DTI ratio is 30 percent, your loan would be approved. However, if your DTI ratio is 55 percent, you would need to find other financing options. Perhaps your lender offers debt consolidation loans that could reduce your DTI ratio, which brings us to the next step:

STEP 2-The Maximum Payment
The next step is to determine the maximum monthly payment you can afford for remodeling. Multiply your monthly gross income amount by the lender’s maximum DTI allowance, and subtract your current total monthly expenses, excluding the estimated remodeling payment.

Gross Monthly Income $ ________________
Lender’s DTI ratio x ________________
Subtotal = $ ________________
Total Monthly Expenses – $ ________________
Maximum Affordable Payment = $ ________________

If the last line is negative, you will not be able to borrow from that lender. See step 3 for further options.

STEP 3-Consolidation
If your DTI ratio was above the lenders accepted percentage, or if your maximum affordable payment was too low, you may want to consider a debt consolidation loan. This would incorporate your current debts into the home improvement loan. Not only does this allow you to roll your debts into what may be a tax deductible loan, it also provides one easy payment for your debts and lowers your DTI percentage. In addition, the interest rate on a debt consolidation loan may be lower, which will save you additional money.