By Laura Jean Whitcomb

How can you improve your lifestyle and personal balance sheet at the same time? Invest in your home. Not only can you increase the property value, but you can make your life just a bit easier by replacing the old spiral staircase or streamlining the kitchen.

Remodeling on the Rise

The U.S. Commerce Department estimates that homeowners spend about $90 billion annually to improve and repair their homes. It’s a number that increases every year — no matter the state of the economy.

“Remodeling expenditures throughout the U.S. continue to increase, despite the overall lag in the economy,” says Lisa Gunggoll, Director of Marketing & Communications for the National Association of the Remodeling Industry (NARI). “Baby boomers are reaching the age where they have the income to complete home improvement projects at the same time that their homes are reaching the age where improvement is necessary. Also, since 9/11, more Americans are ‘nesting’ and prefer to stay in their homes, making them as comfortable as possible as the center of their lives.”

With a housing shortage in many areas across the country, making do with what you have seems to be the best option. “There’s little inventory in this part of the world, and the houses that are available are not priced realistically,” says Robert O’Brien, Senior Vice President of Lake Sunapee Bank in Lebanon, N.H. “Those who can’t afford to upgrade to a different house are opting to remodel. We’ve seen a box office number of applications coming in this year.”

Sam Reddy, Vice President of the Home Builders and Remodelers Association of New Hampshire, agrees. “It’s been easier to build than buy,” he says. “People are adding or renovating rooms to keep up with what is going on with their families.”

Remodel Now, Pay Later

Very few of us have thousands of dollars available for remodeling projects. Updating the bathroom may just have to wait until there’s padding in the savings account or there’s a windfall of cash. Not true! Let’s take a look at some of the different ways to pay for a remodeling project.

Savings: Some homeowners like to save the entire amount before they start a home improvement project. The best thing about this option is no paperwork with a lender and no interest. But it also means deferring the actual improvement until you have the funds.

Credit Cards: No hassle, but high interest rates — in some cases more than double the going rate for a first mortgage.

Cash-out Refinance: This means refinancing your existing mortgage loan. If you have enough equity or the interest rates are lower than when you first borrowed the money, this is a great financing vehicle.
Home Equity Line of Credit: This is the most popular way to refinance a major home improvement. “Think of it as a large credit card for an extensive remodeling project,” explains Michael Sanderson from Sugar River Savings Bank. “If you take out $100,000 and pay back $20,000, you can use that $20,000 again. This re-advance capability is great for continuous work on your house.”

Home Equity Loan: There are two main differences between a line of credit and loan. First, you can only borrow once and you borrow a pre-set amount. Second, the payment amount, schedule, and the interest rates are fixed. But the closing costs will be less and you’ll know exactly what your payments will be and how long they will go on.

Construction Loan: If you’re building your house from the ground up or doubling the size of your home, ask about a construction loan. Money is advanced to pay construction bills as they become due, and borrowers pay back on the outstanding amount. “This makes the loan more affordable, especially if homeowners are still paying rent while their house is being built,” says Sanderson. Keep in mind that if you get a construction loan, you can’t start work on the project, finish half of it, and finish the rest later. Many lenders require a completed house at the end of nine months.

Contractor Financing: When a contractor offers a financing service, he is often using an established relationship with a lender to expedite the processing of your loan. The array of options just listed will still be available to you.

Money, Money, Money

How much you borrow depends on your credit rating, your loan-to-value ratio, and the length of the loan, and whether you’ll pay points. Here’s an explanation of the factors that determine the amount of money you’ll get from a lender.

Credit rating: An A rating (no late payments in the last 12 months and no maxed out credit cards) gets you the best interest rates and terms.

Loan-to-value (LTV) ratio: This is a percentage of the appraisal of your home. The usual limit is 80 percent, for example, $100,000 of a $125,000 home. Lenders subtract the mortgage balance (say you owe $70,000) from the LTV ($100,000) and end up with the maximum amount you can borrow ($30,000).

Mortgage brokers represent a number of money sources including regional and national banks, specialized lenders, insurance companies, and even wealthy individuals.

Loan Length: The longer the loan, the lower the monthly payment. But the total interest will be much higher. If you can afford the higher monthly payments, go for it. You’ll pay much less for a 15-year loan than a 30-year loan.

Points: Points are interest paid in advance, and each point is equal to 1 percent of the loan. Paying points up front can lower monthly payments. But keep in mind that if your credit is less than perfect, you’ll probably have to pay points just to get the loan.

Before You Sign on the Line

Traditionally, when you needed assistance with your home purchase or refinance, you probably went to your local banker and made loan arrangements. Today, there are many mortgage companies, banks, and brokers offering a myriad of programs.

Why would you choose a mortgage broker, for example, over a bank? Mortgage brokers represent a number of money sources including regional and national banks, specialized lenders, insurance companies, and even wealthy individuals. But their concern is not for the local community, it’s for the bottom line. “Brokers make money by selling a loan to an investor,” says Lake Sunapee’s O’Brien.

“Bankers take in money from deposits and reinvests the money back out into the community in the form of a loan. Bankers stay involved with the customer and with the loan; brokers, who sell the loan to make money, are a one-shot deal.”

Diversity is the strength of a mortgage broker and they may offer more options than a bank. Try them if you’re looking for a specific rate. But if you’re looking for service and want to build a long-term relationship with a lender, go to your local bank. “At your local bank, you’re going to be able to talk to someone — probably the person making the decision — and be able to ask questions,” says Sanderson. “They’ll be there with you throughout the duration of your loan.”

Before you sign on the line, develop an accurate estimate of how much money you’ll need. Lenders usually ask for a specific figure before any paperwork gets under way. “No guesstimating,” says Sanderson. “Have a fairly clear picture of what you want to do and how much it is going to cost. It’s easier to go forward with a plan.”

Ask the contractor for a firm bid, broken down into labor and materials. Add in 10 percent for surprises. If you’re doing the project yourself, add in 30 percent of leeway.

You should also consider if the project is going to provide a return on investment (ROI). Paybackestimator.com provides both regional and national averages for different remodeling projects. You can choose one of 65 regions to access remodeling cost, value, and tips for your closest metro area. Type in Nashua, N.H., for example, and you’ll find that a bathroom addition has a 95 percent payback and a basement refinish a 48 percent payback. Try Burlington, Vt., and see how location makes a difference on the ROI of a remodeling project: The bathroom addition is only a 68 percent payback and a basement refinish is 70 percent.

Whether you’re updating a room or increasing living space by 600 feet, “know what your costs are,” says O’Brien. “Research loan options, lenders, contractors, and costs thoroughly. Due diligence is key.”