Financing Your Home Improvement Project

There’s good news afoot for home improvement contractors. According to the Leading Indicator of Remodeling Activity, home improvement projects will be seeing an upward trend in activity in 2011.

The past three years have been tortuous for both homeowners and contractors. The former were hesitant to plan construction projects because of dour economic conditions and job insecurity, which left the latter struggling to find work. That gloomy picture is about to change next year—at least according to the Joint Center for Housing Studies of Harvard University.

According to Eric S. Belsky, the Center’s Managing Director, “A recovering economy should stabilize house prices and consumer confidence levels, encouraging homeowners to reinvest in their homes and undertake deferred repairs and replacements.”

If you’ve been itching to remodel, here are some home improvement loan tips that will help you scratch away.

Finding home improvement funds

The most efficient way to finance your home improvement is with cold, hard cash. Although cash is king, most people don’t have enough of it to pay for a renovation of their castle. As a result, homeowners turn to the equity in their properties for home improvement money for two reasons: because it’s available, and because it will improve the value of the dwelling. The three ways to tap your home equity are through a fixed-rate home equity loan, an adjustable-rate home equity line of credit (HELOC), or a mortgage refinance.

     1. Home equity loan. Also known as a second mortgage, a home equity loan is generally used when you know exactly how much the renovation will cost, and you want no surprises in your financing. You’ll pay a fixed rate, and the loan will be amortized over a fixed period of time. Interest rates will be higher than they would be for a mortgage refinance, because there’s more risk involved – in the event of default, the primary loan gets paid off first, leaving the second mortgagee holding the bag.

     2.  Home equity line of credit. A HELOC works much like a credit card. The bank will extend a line of credit, and you can withdraw as much money as you need. The rate is adjustable, so it’s hard to predict how much interest you’ll be charged on a monthly basis. Many HELOCs offer the option of paying interest only during the draw period. Be careful though—when the draw period ends, you’ll need to refinance the balance or pay it in full. Closing costs for HELOCs are minimal.

     3.  Cash-out refinancing. Another choice is to refinance your mortgage, and take cash out of the accumulated equity in your home. This process is identical to applying for your first mortgage, except with less paperwork because you already own the home. You can choose a fixed or adjustable rate. Closing costs will be 3 to 6 percent of the mortgage amount, and your mortgage clock will be set all over again.

The Joint Center for Housing Studies is predicting several good years for contractors. If you’ve been contemplating a renovation, it finally may be time to help make their predictions come true.