How to Pay For It

Question: How can I finance work needed on a fixer-upper?

Answer:

According to the Millennial Housing Commission, few lenders are willing to administer home improvement loans. Most prefer to make home equity loans or unsecured consumer loans because they are easier to manage. Home improvement loans usually require inspections and irregular draws on the loan amount as work is completed, which requires regional or national lenders to find local partners to provide oversight.

Financing repairs and improvements with home equity is okay for most homeowners, but it is difficult for many first-time buyers. They have lower-incomes, smaller savings, and have made lower down payments on their homes than first-time buyers a decade ago. So they have little equity to borrow against. Unfortunately, it is often lower cost older homes purchased by first-time buyers that need the most work.

Unless you have a cash reserve, you will have to shop around for the best borrowing terms. In addition to the options listed above, you can ask relatives for a loan. Borrow against your whole life insurance policy. Refinance your existing mortgage and take out cash. Get a second mortgage. Contact the government about home improvement programs. And - as a last resort - borrow from a finance agency, which generally charge high rates.

Question: How does refinancing work?

Answer:

With a refinancing, you pay off an old loan on your home and take out a new one, usually at a lower mortgage interest rate. To refinance, you will generally need to have equity in your home, a good credit rating, and steady income. You can borrow a percentage of the equity to cover remodeling costs, debt consolidate, and college tuition. When you refinance, you will incur all the closing costs that go along with getting a new mortgage. So unless you're doing extensive renovations and can get a mortgage interest rate at least two points below your current loan rate, you may want to select another financing option. 

Question: What about a second mortgage?

Answer:

 It is a loan against the equity in your home. Financial institutions will generally let you borrow up to 80 percent of the appraised value of your home, minus the balance on your original mortgage. You may incur all the fees normally associated with a mortgage, including closing costs, title insurance and processing fees. 

Question: Is a home equity line of credit similar to a second mortgage?

Answer:

A home equity loan, like a second mortgage, lets you tap up to about 80 percent of the appraised value of your home, minus your current mortgage balance. But because it is set up as a line of credit, you will not be charged interest until you actually make a withdrawal against the loan, although you will be responsible for paying closing costs.

The withdrawals can be made gradually as you begin to pay contractors and suppliers for handling your remodeling project. The interest rates on these loans are usually variable. Of particular importance: make sure you understand the terms of the loan. If, for example, your loan requires that you pay interest only for the life of the loan, you will have to pay back the full amount borrowed at the end of the loan period or risk losing your home.

Question: How does an unsecured loan work?

Answer:

The interest rates on these loans are often higher than on secured loans and you generally will not be able to get a tax deduction for the interest paid. However, the costs to obtain an unsecured loan are usually lower. And the relative ease of getting this type of loan makes it popular for small projects costing $10,000 or less. The lender evaluates applications based on credit history and income.

Question: Does the federal government offer home improvement programs?

Answer:

Yes. Among the most popular:

• Title 1 Home Improvement Loan. HUD insures the loan up to $25,000 for a single-family home and lenders make loans for basic livability improvements - such as additions and new roofs - to eligible borrowers.
• Section 203(k) Program. HUD helps finance the major rehabilitation and repair of one- to four-family residential properties, excluding condos. Owner-occupants may use a combination loan to purchase a fixer-upper "as is" and rehabilitate it, or refinance a property plus include in the loan the cost of making the improvements. They also may use the loan solely to finance the rehabilitation.
• VA loans. Veterans can get loans from the Department of Veterans Affairs to buy, build, or improve a home, as well as refinance an existing loan at interest rates that are usually lower than that on conventional loans.
• Rural Housing Repair and Rehabilitation Loans. Funded by the Agriculture Department, these low-rate loans are available to low-income rural residents who own and occupy a home in need of repairs. Funds are available to improve or modernize a home or to remove health and safety hazards.

Question: What about state and local governments?

Answer:

Just about every state now offers loans for renovation and rehabilitation at below-market interest rates through its Housing Finance Agency or a similar agency. Call your governor's office to get the name and phone number of the agency in your area.

At the municipal level, many cities also have programs for special improvements to certain blocks and neighborhoods they are trying to spruce up. Call City Hall, as well as a Community Development Agency in your city.