Financing a Home Improvement Project

 

Financing a Home Improvement Project with Construction Loan

There is also the possibility of obtaining a construction loan for financing your home improvement project, however this is typically done by a builder.

Construction loans are dispersed to you as you incur costs during the project. You pay interest only on the amount that has already been dispersed to you.

Note: construction loan interest rates are priced a little higher than conventional loans and have very short repayment schedules (e.g. 9-12 months).

 

 

Construction loans can also frequently be converted over into a conventional mortgage (e.g. 30 year fixed) after the home is complete.  Banks are usually adverse to providing construction loans to homeowners as the risk of default is quite high. Inexperienced homeowner's attempting to be their own general contractor too often fail at the attempt. This said, however, if you are planning to build a new home as a full time job and have detailed plans, costs, and schedules a bank may accept a non-builder's construction loan application.

Financing a Home Improvement Project with Conventional Loans

Returning to the three main methods of financing a home improvement project; cash, home equity loans and refinancing a mortgage. Each have their pluses and minus.

The use of cash of course prevents debt. Debt that typically shows up in the form of monthly payments. If you are flush with cash, but have low monthly income then using cash to finance a home improvement project may be wise. On the other hand, if you are depending on the interest bearing cash for monthly income or for another major expense (college tuition) then obtaining a home equity loan or mortgage may be a better choice for financing a home improvement project.

Home Equity loans allow you to borrow money from a bank using your home's equity as collateral. You can typically borrow up to a certain percentage of the equity that is in your home. Home equity (HE) is equal to the Market Value (MV) of your home minus the amount you already owe on a home (OWE). Say for example your home has a current market value of $200,000 and you currently owe the bank, via your existing home mortgage $150,000. Your home equity is $50,000.

HE = MV - OWE

HE= $200,000 - $150,000 = $50,000

Home Equity loans typically have shorter repayment schedules (e.g. 5-15 years) and are priced higher than conventional long term rate fixed home mortgages.