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Home Improvement Loan Tips
Before you launch into a home improvement campaign this year, there
are several important factors to consider. First and foremost are the
financial repercussions of the improvements you plan to undertake. As
a rule, the more practical an improvement, the greater its value to
the next buyer. A kitchen remodeled in royal blue may make you very
happy, but it may be a liability at the time of resale. Potential buyers
tend to value most items such as a new roof, exterior siding, insulation,
and upgraded mechanical systems (including wiring or plumbing).
Loan Options
For your home improvements there are many different types of loan options
available. Generally, the type of loan offered rests on three variables:
(1) the borrower and his general financial capacity; (2) the improvements
planned; and (3) how the improvements will affect the overall value
of the house.
While most home improvement loans are made
to persons who have owned their residences for a few years, in the past
decade it became commonplace for buyers to apply for loans covering
both purchase and improvements. Regardless of which type of loan you
will need, certain tips will help your chances for loan approval.
Documentation
Before going to a lending institution, prepare a detailed description
of the planned improvements. Include specifications and estimates of
how much the improvements will cost. Negotiate with a contractor beforehand
so that you can bring along a copy of his contract. You need to show
that a contractor has agreed to do the work at a set fee. Also, be prepared
to furnish a complete cost breakdown of the job. Your cost breakdown
should include a list of the materials that will be needed, along with
the prices.
Additional Homework
Beyond the documentation for repairs, you will need to have a qualified
appraiser look at your home. The majority of the loan options available
are tied into the current value of the house; other options are tied
into the value of your house after the renovations are completed. Before
planning changes, be sure your home currently meets code requirements.
If you are making a major addition, check local zoning ordinances and
building codes to find out what you are allowed to do and how you are
required to do it. Above all, be comfortable that you can afford to
pay back the loan.
Another tip from the experts is to look at
the loan options with an open mind. You may want to consider an equity
line of credit or a second mortgage to fund your improvements. But you
may feel safer arranging a construction-type loan for the renovation,
and using collateral other than your home to secure the loan. (Note:
in a construction-type loan, funds are disbursed as stages of the project
are completed.)
Plan Ahead
If you want to borrow money for home improvements, it's important to
think ahead. How well you plan will influence the resale value of your
home, the type of loan options you are able to negotiate and even the
tax repercussions of the planned work. For example, money spent on certain
improvements can be used to increase your cost basis in the home, and
increasing the amount you can retain from the sale. But documentation
must follow the IRS guidelines for "improvement." The IRS stipulates
that "improvements...add to the value of your home, prolong its life,
or adapt it to new uses." Repairs that just keep your home in working
order are not deductible.
By following a few simple guidelines, you can
come out way ahead and add to both the enjoyment of your home and its
long-term value.
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