Paying For Home Improvements

There are many ways to pay for your home improvement. When you buy a fixer upper, you expect to undertake a significant amount of home improvements. If you buy a home in good condition, remodeling and repairs may be the last thing on your mind when you close the deal. You may however be prompted to remodel by a leaking roof, a change in the size of your household, or the need to convert the basement into the headquarters of a home-based business.

There are a number of options to pay for improvements, including paying cash. However, most homeowners favor financing the job, especially if it involves significant remodeling or repair.

Leveraging Payback
A rule for financing home improvements is to match the loan type to the estimated resale value of the project. This means taking out short-term loans for projects which don't add significant value to the house, and securing long-term financing for improvements with guaranteed payback value, like remodeling the bathroom, kitchen or building an additional room.

For remodels with a lower payback value (such as adding a screened-in porch) it's best to have the project paid off before you sell the house. For projects that offer a significant return on your investment, you can choose long-term financing and pay it off when you sell the house.

Short Term Options

• Home Equity Line Of Credit
  An open ended adjustable rate line of credit for 75 to 80% of home value minus value of mortgage
   
• Personal Loans
  Short Term, fixed rate loan. Interest rates may be higher than home equity loans or 2nd mortgages
   
• Consumer Credit
  An unsecured, high-interest line of credit with no restrictions on use
   
• Home Equity Loan/Second Mortgage
  Fixed-rate, five- to 20-year loans for 75 percent to 80 percent of the home's appraised value
  minus the balance of the mortgage.
   

Long Term Options

• FHA Title 1 Loan
  Fixed-rate, government-insured, 15- or 20-year loans that allow homeowners to borrow up to $25,000 to make non-luxury home improvements; no equity is needed for loans under $15,000; no security is needed in most cases for loans under $7,500.
   
• Cash Out Refinancing
  Adjustable or fixed-rate 15- to 40-year loan for 75 percent to 80 percent of the home's appraised value. Depending on the balance of the original loan, the remaining cash from the refinancing can be used at the homeowner's discretion.
   
• Value Added Mortgage
  Adjustable or fixed-rate loans for up to 90 percent of a home's remodeled value
  (cost of remodeling rolled into loan).