For many people planning to remodel their homes, finding the money to finance the project may seem to be the most difficult issue. But even with the perfect storm of the Mortgage Meltdown, Credit Crunch and the Housing Slump, would-be remodelers with a good value proposition, decent credit rating and well-defined remodeling plans should be able to find a way.

 

Before getting into the types of financing available and where to find money for remodeling, let’s go over what you should do before you start looking for a loan.

 

 

 

 

 

Armed with a reasonable financial scenario backed up with professionally prepared assessments and estimates, you’ll be ready to look for a remodeling loan.

 

Savings. If you have enough money socked away to pay remodeling costs out of pocket, it might be your best bet. If you’re currently collecting 1 to 2 percent on your CDs but would pay 5.5 to 8.5 percent on a loan, consider the ultimate savings. You might also consider paying remodeling costs from savings through completion of the project, then refinancing your mortgage based on the home’s enhanced value to restore your savings accounts.

 

Home-equity line of credit. If you have substantial equity in your home, a home-equity line of credit might be the best way to finance all or part of a remodeling project. Interest rates on home-equity loans are lower than for most other types of home and construction loans, and they generally involve no closing costs. Since you can draw on a home-equity line of credit as you need to, you don’t have to borrow a large amount all at one. You pay interest only on the amount of money you use.

 

Mortgage refinance. If you have enough equity in your home and particularly if your current mortgage-interest rate is higher than rates presently available, why not refinance to obtain funds for remodeling? You just might end up with a bigger, better and more valuable house and a monthly payment not much higher than your current one.

 

Construction loan for residential property. These are available in several flavors, including “purchase-and-remodeling programs” and “rehabilitation loans.” Rates on these types of loans are generally higher than for home-equity lines of credit and standard mortgages, but they generally offer larger sums since they base loan ceilings on the projected value of the remodeled home rather than its current value. Some are “combination loans,” which start out as construction loans and automatically convert to mortgages on project completion. Combo loans involve only one round of closing costs, which makes them more convenient and possibly more economical than the typical scenario—closing first on a construction loan, then on a mortgage. Purchase-and-remodeling loans may offer remodeling opportunists to take advantage of bargains available in weak housing markets.

 

401(k) and other retirement-plan loans. Consider taking a loan against your retirement account to supplement your available credit through equity. Interest rates on retirement plan loans are low, and you actually pay the interest to yourself rather than to the retirement plan manager. It is not possible to take a loan against an IRA, and the risk with any retirement-plan loan is that if you should lose your job, you have to repay the balance of the loan immediately. If you don’t have the cash on hand, the balance will be collected from your account, and you’ll be required to pay income taxes and premature-withdrawal penalties if you’re younger than 59-1/2 years old.