As you do your house cleaning, you may think of a new feature or two you’d like for your home. Although improvements can be expensive, thinking through the logistics and costs can give you a sense of the potential benefits too. Here are some planning and financing strategies that can help get you started.
Before delving into details, step back and consider how necessary and effective the improvements will be. If you might move in the next few years, some projects make less sense than others. If your motive is to change the atmosphere of a room, first see if simply cleaning or reorganizing it might do the trick. Ideally, an improvement should boost your home’s value, so bear that in mind. In this regard, some changes are much more effective than others.
Go to the drawing board
You don’t have to be an artist to sketch some plans. If you don’t want to resort to pen and paper, try a user-friendly software program for home design. Some let you use templates and customize floor plans. However you get a visual, measure the room or section you want to change. Knowing your vision can help prevent misunderstandings with contractors.
Break down costs
Once you narrow down what you want, if you’re not going to do it yourself, you need to find a contractor. Get written estimates from several before settling on one. Also, check to see if you need a permit for the work, and whether official inspections are required. Even if you’re doing it yourself, materials can add up quickly. The national average cost of a “minor” kitchen overhaul, including refacing cabinets, resurfacing the floor and countertops, and replacing some appliances, is about $21,198, according to Remodeling Magazine. It projects that 81.1% of the price can be recouped in a subsequent sale. By comparison, replacing a steel entry door costs about $1,471 but adds at least that much to the property’s value.
Once you have a grasp on the purpose, design and estimated costs of a project, the next step is to consider financing. If you don’t have enough cash saved up but you’ve built sufficient equity in the property, you may be able to borrow against it. Your equity is the difference between the home’s current appraised market value and what you owe on it. Lenders like Seattle Credit Union may let you borrow up to 100% of the value of your home (minus any other amounts you owe on your home) with terms up to 15 years.
Home equity borrowing comes in two basic types: one is a loan that delivers all of the borrowed funds at once, generally with a fixed interest rate and fixed term; the other, called a home equity line of credit, or HELOC, is more flexible and carries a rate that can change periodically. Both offer potential tax benefits, as the interest may be deductible. Both also present a risk of potential foreclosure if you fail to make the payments as required. Also, there can be substantial costs, as borrowing against home equity is similar to getting a first mortgage.
Here are more of the pros and cons of each type of loan:
Home equity loan
- PRO - With this option, you get the full amount borrowed upfront and pay back a fixed amount each month over a set period of time.
- CON - A downside of this type of debt can emerge if interest rates fall after you sign up for the money and lock in your rate, since you may end up paying more in interest than if you had waited.
Line of credit
- PRO - A HELOC provides more flexibility in how much you borrow, up to a set maximum. You pay back at least a minimum amount each month. A HELOC can be useful if you want access to money on an as-needed basis until you finish a project.
- CON - A downside is that you may end up paying more for the debt than anticipated if rates rise while you have a balance outstanding.
From the initial planning to financing, how you prepare can make the process of improving your home much more manageable. There can be risks and many expenses, but knowing about loan options can help ensure that your project goes more smoothly from idea to reality.