11 Ways Homeowners Can Fund Major Home Improvements

Any homeowner has a long wish list of projects to improve their home: renovate the kitchen, add a deck, change outdated light fixtures, build an addition, update the heating system and more.

What stands between most home improvement dreams and reality is money, of course. Home improvements can be expensive, which isn’t news to most homeowners. But the good news is there are ways to come up with the money needed for home renovations.

“If you have cash, it’s perfect,” says Cannon Christian, president of Renovation Realty in Southern California. His company renovates homes in preparation for sale and defers payment for the renovations until the house is sold.

Life, however, is not always perfect. If you plan to stay in your home and don’t have cash, how can you pay for home improvements?

“It depends on the circumstances,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area. “If your current mortgage is not all that favorable, refinancing your first mortgage is the way to go.”

But, he adds, that comes with one caveat: You don’t want to still be paying for improvements long after their shine has worn off. Financing a paint job over 30 years means a very expensive paint job, plus you’ll have to repaint two or three more times before you’ve finished paying for the first job.

“The biggest mistake that people make is they finance their home improvements for a longer time than the improvements will last,” Fleming says. “In 10 years, they’ve just barely begun to make progress on the principal, and they need to replace them.” Then they refinance and pull out cash again to cover the next round of improvements.

If refinancing your mortgage and plucking out cash for home repairs is your best financial move, there are some steps you can take to accelerate your payments. If you’re five years into a 30-year mortgage, for example, consider a 25-year or shorter term on the refinanced loan. Or accelerate your payments to pay off the balance in the 25 years remaining on your original loan. Making additional payments on principal is another option.

The other important point to consider when borrowing for home improvements is that, if you run out of cash before the renovation is finished, you may not be able to get a loan of any kind until your home is livable again.

Lenders will let you borrow up to 80 to 90 percent of your home equity, depending on your credit and the loan product. Refinancing, home equity lines of credit and home equity loans all have closing costs, though some lenders offer to fold those costs into the loan so there is no cash outlay up front.

Here are 11 options homeowners have to pay for home improvements.

Cash. This is obviously the easiest and best way to cover the costs of home improvements. You won’t have future payments and you won’t encumber the equity on your home. “It’s always more financially sensible to wait until you can pay cash,” Fleming says. For many people, that means doing one small project at a time. Take on safety improvements first, but otherwise prioritize what you feel is most important and can afford.

Refinance your mortgage. This is the best option for homeowners who would benefit from refinancing anyway, perhaps with a lower interest rate, as long as they don’t spread the cost of the improvements over more years than the renovation will last. The average rate for a 30-year mortgage in the last week was 3.9 percent and the average rate for a 15-year mortgage was 3.1 percent, according to Freddie Mac’s Primary Mortgage Market Survey.

Home equity line of credit. If you already have a good first mortgage, a home equity line of credit can be a good option. With these loans, you draw out money as you need it and pay it back at your own speed, as long as you make at least minimum monthly payments. “You don’t have to pay interest until you use the money,” Fleming says. The equity line is usually good for 10 years and is sometimes renewable. However, if you don’t make payments, you could lose your home. Interest rates are adjustable, prime plus a specific amount. Bankrate.com’s average for this week was 4.75 percent for a $30,000 home equity line of credit. Keep in mind that a lender or bank with whom you have a relationship might offer a better deal.

Home equity loan. With a home equity loan, you borrow a fixed amount and pay a fixed payment over a certain amount of time. A 15-year term is typical, but with some lenders you can go as short as five years and as long as 30 years. “A home equity loan is the best option only if you’re allergic to adjustable rates,” Fleming says. “It’s still cheaper than a construction loan.” Bankrate.com’s average was 5.22 percent for a fixed-rate home equity loan. More here.

A circular saw is being used to cut a stud in the kitchen at a home remodeling construction site.

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Why you should make a home your first investment

Originally, this was to be a two-part series discussing the pros and cons of buying a home as opposed to investing. The purpose wasn’t to pick a winner or loser, per se. (After all, one of the main tenets of Get Rich Slowly is that you really should do what works for you.) Instead, the purpose was to highlight the strengths and weaknesses of both options in case you were faced with a choice for some reason.

Holly Johnson’s article should you buy a home or (invest?) was first; and she said that, if she had to make that choice, she “would invest for the future and forgo the house in a New York minute.” I intended to explain the benefits of the opposite side of the hypothetical.

But you stole my thunder! So many people made great comments in response to Holly’s post that I thought it would be better to explain what was left over or unclear for some reason. We both started by looking at the past.

The (more common) way to build wealth

Two activities have stood the test of time throughout history as the best ways to make money:

  1. Trading
  2. Real estate investing

If you look at America’s list of millionaires and what they did to get there, you will observe the most common path to millionaire status in America has been real estate.

Sure, you have the Warren Buffetts who did it by investing in stock, and you have the Zuckerbergs and Gateses who did it by starting new companies and riding them to fortune. But most of the lower profile millionaires built their wealth with real estate.

There is a reason for that. As my dad always used to say: “Everyone has to live somewhere.” The world’s population is expanding, but Mother Earth isn’t. So it isn’t hard to see the math of supply and demand working in favor of real estate investing.

Limiting the price for shelter

Consider the precept that, if you want to build wealth, one surefire thing you can do is to limit your expenses. Look at your budget. What is your largest expense? Housing. Whether it’s your rent or a mortgage payment, unless your house is fully paid off, chances are there is nothing you spend more money on than that. (Well, okay, if you’re leasing two Ferraris and a Mercedes, your cars may cost you more, but then you admit you’re not typical.)

Jeff nailed this concept in the comments of Holly’s article:

My mortgage will end while rent never does. When I buy, I am locking in my price. Housing can go up and down in value but my mortgage doesn’t change based on that, what I owe is what I owe, even when prices rise 20% or crash 20%.

When you think about your future, what offers you better security than having a shelter of your own choice … with no rent or mortgage payment?

Look around you at retired people who are living comfortably, and look at their finances. Nine out of 10 will have a paid-for home. Not only have they locked down the price of housing for the term of their mortgage, they effectively brought the expense down to zero as compared to rent once the mortgage is fully paid.

You can’t get there if you don’t buy a home.

Expense conversion

To me, one of the biggest reasons to buy a home first is that it puts an (inevitable) expense on a track to become an asset. Like all investments, that difference usually starts out quite small, because in the beginning most of your monthly payment to the mortgage bank is interest. However, as time passes, more and more of that monthly amount transitions from expense to an asset, i.e., the equity in your home.

That, to me, is nothing short of a thing of beauty; and to my mind, it’s the biggest single reason people who are secure in retirement got there.

The concept of leverage

Ec was one of the few that mentioned leverage as an advantage to buying a home over investing your money:

Secondly, the other big advantage of owning your own home is leverage. If you had 30k to invest in 1940, based on a typical ltv ratio of 80/20 you could buy a home worth 600k. Would you rather have 600k growing at a slightly lower rate or 30k growing at a higher rate?

But judging from the fact that only three comments mentioned it, I thought it would be good to explain the concept.

Most of us know that debt is more evil than good … except, of course, when it comes to buying a home. One of the big things that makes buying a home the first step in most people’s financial security is that debt. Home mortgages are usually the cheapest loans out there, so the burden imposed by paying interest is relatively minimal. More here.

Mortgage-calculator

How leverage works

Here is where the math becomes compelling, and it’s rooted in (of all things) inflation. Home prices over the long haul have gone up in most places. That is something we love, isn’t it? That appreciation is also called inflation … but it’s the kind of inflation that works for us.

And leverage is how we make inflation work for us. Here’s the math:

12 Ways Homeowners Can Avoid Home Improvement Rip-Offs

We’ve all heard the horror stories: contractors who took thousands of dollars and then disappeared,home renovations that dragged on for months or work so shoddy it had to be completely redone.

These nightmare scenarios may frighten you, but if you do your homework, you can prevent yourself from being ripped off by a bad home improvement contractor.

“It’s beyond just finding the name of the person you want to use,” says Angie Hicks, founder of Angie’s List, which provides reviews of contractors and other service providers. “These are big investments and can be highly emotional because it is your home.”

Many homeowners spend weeks and months planning their projects and then expect to hire a contractor in a few days. But if you want a good contractor, expect to spend anywhere from a few days to a few weeks investigating prospects and hammering out contract details.

“You should definitely research the company you’re getting ready to do business with,” says H. Dale Contant, president-elect of the National Association of the Remodeling Industry and president of Atlanta Design & Build. “Make sure that the company is reputable. Double-check and double-check again.”

Spending time on contract details at the beginning of the process can save you headaches later. The contact should be extremely detailed, if possible listing products by name and serial number. It should include a timetable for completion of the project and a schedule of progress payments, as well as how you and the contractor will handle changes. Don’t be afraid to negotiate changes to the initial contract you receive from the remodeling firm.

“Don’t forget your gut instinct,” Hicks says. “If it feels like someone you’re talking to is not communicating well, that’s a big sign.” She warns that you should pay especially close attention when you first initiate contact with the contractor. “Watch the little things at the beginning because they might be indicative of bigger things later.” More here.

Man and woman looking at blueprints together

How Mortgage Lenders Price Loans — and Why You Should Care

So you’ve probably seen the news about those low mortgage interest rates and their impending rise, but you may not realize that if you were to get a mortgage, your interest and fees may actually be different. Let’s look at how rates and risk-based pricing can affect the cost of your loan.

When you see ultra-attractive loan offers or hear the media touting the latest development in interest rates, take it with a grain of salt. Lenders price your loan with adjustments based on certain risk factors set by Fannie Mae and Freddie Mac. Always remember to read the fine print.

Here are most common factors that lenders, banks, and brokers use to calculate a rate and fee offer:

  • Your specific middle credit score
  • Loan-to-value (or, the percentage of your down payment)
  • Loan size
  • Loan product
  • Loan term
  • Lock time frame
  • Purpose of the loan (to purchase or refinance)
  • Occupancy
  • Property type

When you go to apply for a mortgage or request a rate quote, the mortgage company’s pricing and rate will reflect these nine pricing adjustments.

The more of these factors that come into play, the riskier the loan. And this is what can make the pricing and rate much different from the national average you’ll see or hear about in the news.

Let’s say the average national 30-year fixed-rate mortgage is 3.91% with 0.6% in discount points. Here’s how that could play out in this scenario:

  • Your credit score is 700
  • Your loan-to-value is 80% (so you have 20% equity or down payment)
  • Your loan size is $418,000
  • It’s a conforming loan
  • 30-year fixed-rate mortgage
  • You have a 30-day rate lock
  • $40,000 cash-out refinance
  • Single-family home
  • Primary residence

Here are the factors that can affect the cost of your mortgage:

It would not be uncommon to see a scenario like this resulting in a rate of 4.125% with 0.5% in discount points, for example.

When reviewing your mortgage rates, it’s ideal to check them against the national average rather than comparing countless lenders. This is because the national average rate from Freddie Mac already takes into consideration the overall aggregated mortgage market in terms of rates and points anyway.

How mortgage pricing moves with economic news

Here’s a quick lesson in finance. Mortgage bond prices move in the form of basis points, and 100 basis points equals 1%.

Certain economic factors change the direction of stocks and bonds, things like domestic and worldly happenings and more specific indicators such as the jobs report, retail sales data, consumer confidence, Federal Reserve meetings, and more.

On any given day the market is negative, unchanged, or improved in the form of basis points. If you have your eyes on a 4% mortgage rate with no points on a 30-year fixed after the lender takes into consideration all of the pricing adjustments, and you’re hoping for something better by floating your interest rate (that is, not locking in your rate), and the market worsens 25 basis points, your 4% rate would still be available, but it would come at a cost of 25 basis points of your loan amount. If you’re looking at a loan of $400,000, that’s $1,000 in the form of discount points based solely on market forces. Such a change would come as a closing item in the form of discount points.

If the market improves by 0.25% and you’re looking at that 4% interest rate, now the 25 basis points will be a credit toward fees.

The higher the rate you choose to pay, the lower the fee tied to that specific rate. Conversely, the lower the rate you select, called “no points,” where no lender credit is awarded, but there are also no points paid either, is a middle-of-the-road option many opt for.

Market timing is hindsight

There’s no such thing as a nonprofit mortgage lender. All mortgage companies — brokers, banks, credit unions, any financial entity that offers mortgage loans — have a profit motive.

Securing the lowest possible interest rate is impossible, because you’ll never be able to borrow money at the lender’s cost of funds, ever. Moreover, there is no way to time the market; all you and your lender can do is make an educated decision about the rate and the pricing tied to your mortgage transaction in lockstep with the market. More here.

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Fall Cleaning Checklist; because it’s almost here.

Inside Your House

  • Wash all windows.

    Use glass cleaner, or one squirt of dishwashing liquid in a spray bottle filled with water, and wipe down with a microfiber cloth. Pick a cloudy day so you can better see any streaks.

  • Vacuum dusty canvas, cotton, and treated fabric blinds.

    Use a low setting with a brush attachment. Vinyl shades can be wiped down with a dampened microfiber cloth if they need a little more attention.

  • Moderately dirty window treatments need a two-step approach.

    Start by dusting or vacuuming the valance and frame, then vacuum from top to bottom using the upholstery attachment for drapes, and the brush attachment for blinds. Or submerge blinds or shades in a few inches of cool water and two teaspoons of dishwashing liquid (check labels first to make sure this is safe). Take out the metal weights first; they can rust.

  • If your window coverings are very dirty, check labels for cleaning instructions.

    Some cotton, polyester, rayon, and wool drapes can be machine washed on delicate. Always send lace, linen, satin, and silk drapes and shades to a professional cleaner.

  • Clean the walls.

    Dust, wash, rinse, and dry painted or wood-paneled walls.

  • Clean ceiling-mounted light fixtures.
  • Vacuum and spot-clean upholstered furniture and cushions.

    Deep-clean if necessary.

  • Wipe down the kitchen cupboards.

    Empty them, wash them down, replace liners (if you use them), declutter, and reorganize.

  • Dust off the refrigerator condenser coil.

    Use your vacuum’s brush attachment and gently vacuum it.

  • Do the carpets.

    Have carpets professionally cleaned if needed.

  • Evaluate any wooden floors.

    Have scratched or dull wood floors professionally scuff-sanded and recoated, or completely refinished.

  • Spruce up your computer.

    Dust the CPU, clean and wipe down the keyboard, and dust off the monitor with a microfiber cloth.

  • Straighten the closets.

    Declutter and reorganize.

  • Test smoke and carbon monoxide detectors.

    Or install them, if you haven’t yet.

  • Replace the furnace filter.

    If you haven’t changed your furnace filter within the past three months, do so now.

More here.