Despite loving your home and having no intention of moving, as the years go by, there are many nooks and crannies, and sometimes entire living spaces,
in need of a good remodeling. Fashion doesn’t last forever and this is especially true when it comes to homes. Furniture, flooring, plumbing and space distribution can pose a real problem to enjoying home life as the years go by, owing to changing tastes and needs. If you are looking for the smartest way to finance your home without affecting your lifestyle or future economic stability, these are just a few tips you may find handy:
1 Try to use savings instead of getting a further loan: If you are planning on a major renovation and you already have a mortgage, think about how realistic it is for you and your family to take out a loan. If you have enough saved, don’t think twice about using a bit of your nest egg to make your home cosier and more beautiful, to avoid paying interest on a loan. This is especially the case if, in addition to a mortgage, you have additional loans.
2 If you need to take out a loan, sit down and crunch the numbers to work out how much you will actually need. Obtain a budget from your home remodelers of choice and add on around 10/15 per cent to the quoted price, for any contingencies which may occur along the way.
3 You will also need to work out how much the bank is likely to lend you. Having an A rating is best appreciated at times like this; meeting your monthly obligations and being responsible with credit card use makes you an excellent candidate for loans. If your credit rating is lower, the gamut of loan types, amount lent and interest rate involved, may be affected.
4 Once you decide to use your existing home equity to obtain a loan, use the Loan-to-Value ratio to determine the maximum amount your bank is likely to lend you. The LTV is usually set at 80 per cent of the value of your home. Say your house is worth $500,000, the LTV would amount to $400,000. The bank would then
subtract the amount you still owe on your mortgage from the LTV. So let’s say you still owe $250,000, the maximum amount you would obtain is $150,000. There are banks which permit you to borrow on a higher percentage of your LTV; some even permit 100 per cent of the LTV; however, in this case, you can expect to pay a considerably higher interest rate. The LTV isn’t the only important consideration; banks will also look at your debt-to-income ratio to determine what monthly repayment to grant you. The lower your interest rate and the longer your loan, the greater is the loan the bank is likely to give you. However, a long loan will mean a larger total interest payment so it’s definitely a case of weighing the pros and cons.
5 Consider whether taking out a second mortgage is right for you. Don’t fear a second mortgage per se; if you will be paying a lower interest rate on it, it may be more interesting than simply extending/increasing your current mortgage.
6 Consider the type of loan that bests suits your circumstances. One is a
Home Equity Loan, under which you receive the whole amount you are borrowing and pay I back in a maximum of around 30 years. The positive side of this loan is that the interest rate is fixed; the negative is that the interest rate tends to be higher than in other types of loans. Another
type of loan is a home equity Line of Credit (HELOC): this type of loan works a bit like a credit card; you are entitled to use a certain amount as needed without having to borrow the entire amount. You are normally required to repay what you have borrowed in around 10 years. HELOCS have an adjustable mortgage rate, however, so you might end up paying a higher rate than you would with a Home Equity Loan. Also, be aware that various financial institutions offer very different conditions on this type of loan so if it interests you, take the time to do the required research. Another interesting loan is the FHA 203(k) mortgage, which allows you to refinance your mortgage and bring the amount you need to improve your home, taking into account the value of your home after the improvements have been made, meaning you can borrow more money. The downside to this type of loan is that interest rates can be a big higher than is the case with other FHA loans and there are closing costs involved; also, the limits on FHA 203(k) loans tend to be lower than is the case with other loans.
7 Consider other possible sources of loan collateral: a savings or retirement account, bonds and stocks may all be used as collateral and the interest rate on loans taken out may be lower than when a mortgage is involved.
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