More and more homeowners are deciding that the best way to improve their lifestyles and their personal balance sheets is to invest in their single biggest asset: their home. Home remodeling and improvements are not only a winning investment because they increase property values, but also because they can help us enjoy life in our own homes. Understanding the basics of home financing is a good first step that will help point you in the right direction for financing your next home improvement project.
Basic Home Financing
Qualifying for a Loan
Before actually applying for a loan, talk to lenders about all your financing options. Keep in mind, the lender will tend to focus on the options they carry. This is why many people like to start with an established mortgage broker as they usually carry more types of loans. Besides helping you understand your options and the various trade-offs involved, the lender can pre-qualify you for one or more loans.
Points and Interest Rates
Many loans involve something called points. Points are nothing more than a fee for the loan that is expressed as a percentage of the loan amount. One point equals one percent. So if you take out a loan for $50,000 and the lender charges two points, the fee costs $1000. Points exist so the lender can pay for the loan set-up expenses, as well as, make a profit.
Mortgage Lenders
Mortgage brokers represent a number of money sources including regional and national banks, specialized lenders, insurance companies and even wealthy individuals. This diversity is their greatest strength. It means that they are likely to offer a wide number of options.
Banks are another very popular way to get loans. If you have a good personal relationship with this mortgage lender and the lender offers a wide variety of loans, this can be a great route to go. If you don't already have a strong relationship with your banker, yet you are confident about getting the loan, this can be a good opportunity to start up that relationship.
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Specialized lenders come in all shapes and sizes. These are generally lenders who specialize in one or two specific types of loans. Their strength is that they are very knowledgeable about the financing options they work with and may have streamlined the processing to the point where they can offer very competitive rates.
Basic Home Financing Options
Variable vs. Fixed Interest Rates
For some loans, the interest rate stays the same throughout the loan. This is known as a fixed rate loan. On other loans the interest rate can rise or fall as market conditions change. These "variable" rates are usually tied to some common market wide interest rate like the prime rate.
Secured vs. Unsecured Loans
In general, loans can be described as secured or unsecured. An unsecured loan is a loan in which the borrower agrees to repay the money according to a pre-set schedule. A secured loan is the same thing, except that if the borrower doesn't keep up with the payments, he/she gives the lender the right to seize a particular asset and sell it to raise the money necessary to pay off the loan—the house itself is the typical collateral.
Contractor Home Financing
Often, when a contractor offers financing, he is simply using an established relationship with a mortgage lender to expedite the processing of your loan. In such cases, you will still be facing the same array of options you see described in this guide. However, there are a few firms that directly provide the home financing. This is most common with activities like replacing windows, installing siding, or putting in a swimming pool.
Specific Financing Options
Savings: Many people prefer to save up the entire amount they need before undertaking a major home improvement or remodeling project.
Credit cards: The main advantage of using credit cards or the cash advance checks that are often associated with them is that there is no hassle at all.
Cash-out refinance: If you have enough equity, or if interest rates are lower now than when you first borrowed the money, this can be an ideal financing vehicle.
Home equity line of credit: A home equity line of credit is probably the most popular way to finance a major home improvement. It is secured by your home, which means that the interest is tax deductible.
Home equity loans: Very similar to home equity lines of credit, home equity loans are also very popular. Compared to a home equity line of credit, you trade flexibility and higher closing costs for certainty about what your payments will be and how long they will go on.
Homeowner loans: Like credit card loans, these are relatively low hassle loans. They are secured by the property, so the interest is tax deductible. However, the loan isn't limited as much by the equity in your home the way most loans are and are granted on the basis of income.
Value added loans: This is a relatively new and increasingly popular type of loan. It basically applies to situations where the improvements you make will have a very substantial impact on the market value of the home.
Homeowners have more options than ever for financing home improvements. While many projects add significantly to the value of the home, the primary reason for undertaking home improvements should be to enhance your day-to-day living.
Marcus Pickett is a professional freelance writer for the home remodeling industry. He has published more than 600 articles on both regional and national topics within the home improvement industry.
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