Remodeling Your Home

Using your home equity to invest in home improvements or remodeling can be a smart move. However, there are some things that you should know before you start and some costly pitfalls to avoid along the way.

1. Choose your improvements wisely

Remodeling your home can be a very expensive proposition. The average kitchen remodel adds up to a whopping $44,000. It's important to consider your return on investment before you start tearing up the carpet. Some improvements add significant value to home while others are relative duds.

Before you start a remodeling project, take a look at home listings in your neighborhood. Which homes are being sold for the highest amounts? What features set these homes apart? Talk to a real estate agent about what would add the most value to your home. Also consider how much a home improvement will boost your comfort and how long you plan to stay in the home.

In general, minor kitchen remodeling, siding improvement, adding a second story, and minor bathroom remodeling are the projects where you are most likely to earn back your investment. Adding a swimming pool, remodeling an office, and adding a sunroom are the least valuable home investments. Visit Remodeling Magazine online for more reports on remodeling costs compared to values.

2. Get an estimate

Sticker shock is pretty common when it comes to home remodeling projects. Paying $10,000 to $70,000 for remodeling one room is pretty standard. Before you start investigating home equity loans or lines of credit, schedule appointments with local contractors and architects to get an idea of how much your project will cost, which permits are required, and how much work will be involved.

Online home improvement cost calculators can give you a general idea of costs, but only professionals in your area can give you a true estimate. You should obtain multiple estimates from different contractors and architects since prices can vary. Look for contractors who are licensed, bonded, and have workmen's compensation insurance and liability insurance.

3. Choose your financing

You've picked the project and selected a contractor …now it's time to get started on financing your remodel. There are several different options you can choose for coming up with the funds needed for a major renovation. Here is a list of the most popular options:

• Cash-out refinance – One option for financing a remodeling project is to refinance your mortgage. A cash-out refinance is when you refinance your home for more than you owe. For example: if you owe $80,000 on a $200,000 home and wanted to borrow $20,000 for a remodeling project, you would refinance for a $100,000 and get a check for $20,000. If interest rates on this new loan are lower than your existing mortgage or if you want to refinance your mortgage anyway, it may make sense to use a cash-out refinance for your project. Calculate your refinance options here.
  
  Pros: One monthly payment. Low interest rate. Refinancing may help you save thousands on your home.
  Cons: The refinancing process takes a long time and can be costly. Cost effectiveness is dependent on current interest rates and mortgage standing.
• Home equity loan – Home equity loans allow you to borrow against your equity without impacting your original mortgage. With these types of loans you receive a lump sum payment that you pay back in monthly installments with a fixed interest rate. Home equity loans are also known as "second mortgages."
  
  Pros: Simple and fast way to access equity. Fixed interest rate and fixed monthly payments.
  Cons: Interest may not be tax deductible. Rates are higher than refinanced mortgages. If you are unable to pay the loan you could lose your home. The loan is due immediately if the home is sold.
• Home equity line of credit: Home equity lines of credit (HELOC) work much like credit cards. After a quick approval process, a lender gives you a credit card or a checkbook that you can use to borrow against your home equity. The account has an adjustable rate and is flexible in how and when you can take out money.
  
  Pros: Quick and flexible way to borrow money. Interest can be tax deductible. May have a lower interest rate than a credit card or other loan. Higher credit limit than standard credit cards.
  Cons: Interest rates can fluctuate. Set-up, transaction, and annual fees may apply. If you are unable to pay the loan you could lose your home. The balance is due immediately if the home is sold.
• Personal loan: A personal loan allows you to borrow up to $15,000 for any purpose. These types of loans are not tied to your home equity or mortgage. The interest rate on a personal loan will probably be higher than what you would receive with a refinance, home equity loan, or home equity line of credit.
  
  Pros: Easy online application and approval. Fixed interest rate. No collateral required. Not tied to your home or mortgage.
  Cons: Higher interest rate. More expensive that other methods of borrowing. Less flexible than a home equity line of credit.

There are other financing options available beyond these four popular choices. For small projects, you could use a credit card to manage the costs. Choose a card with a high credit limit and a low interest rate for this type of project. You can also decide to pay for the remodeling project using money you have saved. Paying for the project this way will help you avoid interest costs, liens on your home, and expensive fees. Just make sure that you still have enough money saved for the entire project.

4. Manage the project

It is easy to let costs get out of hand when you are remodeling. Being a strict project manager can help you keep your remodeling costs within your budget. Original remodeling estimates are rarely perfect. Expect that your costs will be about 10% higher or lower than expected and save some extra money accordingly.

During the remodel, closely watch your costs and your loans to make sure that you are not overextending yourself financially. Avoid making changes to your remodel after the project has already started. Late changes can cause delays and extra costs. Keep in close communication with your contractor to make sure the project is completed without a hitch!