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Renovation Solutions: Ways to fund a remodel without equity

Published: Friday, Feb. 28 2014 3:33 p.m. MST

Remodeling is a big decision. The process will impact several areas of your life and be influenced by many factors, one of which is your project budget and how you will fund your project.

In years past, the financial option of choice was a home equity line or loan. During the past several years — during the housing slump and still today — this type of financing is harder to get. At the end of the third quarter of last year, national numbers were showing an improvement in the housing arena, but one-third of the nation’s homeowners are still upside down on their mortgages and owe more than their house is worth. The financial experts call this negative equity.

If you are in this situation there are alternative options for financing a remodel. Here are a few financial options instead of using your house as collateral.

Personal savings

Experts say (and logic tells us) cash is the best option when paying for a home remodel. Saving for a home remodel or using cash from an inheritance, a bonus or some other windfall is ideal. Some homeowners have a “house savings account” to use toward home improvement projects. One client of ours consistently budgeted $1,000 a month for their house saving account and has been able to pay cash for $20,000 worth of interior and exterior projects since 2006. However, while $20,000 is nothing to sneeze at, more comprehensive remodeling projects will cost much more than that.

Credit cards

If you decide to use credit cards to pay for a portion of your remodeling project, use caution and be smart. You will need to do it in such a way that you avoid high interest by either paying off the balance every month through the project or by using zero interest promotional cards with six- or 12-month same-as-cash offers.

Cards with cash-back rewards may also benefit you in the long run, but only if you use them in a limited manner. Clearly, the bulk of the project will need to be financed another way, though this approach may get you through to the point where you can close construction loan.

Unsecured consumer loan

An unsecured consumer loan may be a good option for a small home improvement project — ones that are less than $10,000. Most financial institutions offer these kinds of loans. Unsecured means that the borrower's home is not pledged as collateral and there is no lien on the home. Instead, the security for the loan is the consumer's credit worthiness. There is less paperwork, but the interest rate is usually higher and is not tax deductible. Of course, this amount would not fund most projects that will involve a general contractor.

One-time close construction loan

If you have a major renovation in mind, then a one-time-close construction loan may work best. This loan allows you to utilize you home's future value to fund your project. This loan usually requires the submittal of complete construction drawings and a project cost breakdown in advance of the loan application. The advantage of this approach is having the construction loan and the long-term mortgage finalized in one transaction. The disadvantage is that the loan doesn’t materialize until after the design work is completed, so these fees need to be covered by another funding source.

With the help of thorough construction documents from an architect and a comprehensive estimate from a competent contractor, you should be able to create an accurate picture of your project’s cost for the bank to review. The bank will review the drawings to put a future value on your home which they will use when considering your loan options.

Make sure all your other financial ducks are in a row before you undergo a remodeling project. It is important to make sure the timing is right for your family so as not to create an on-going financial burden. Never start a project you can’t afford to finish. Finally, don’t forget to budget a contingency equal to 5-10 percent of the estimated construction cost to take care of the inevitable surprises that occur when remodeling.

Having a complete design and a detailed list of all the finishes and equipment you have selected will make sure your contractor’s estimates are as accurate as possible. This is the time to be both thorough and brutally honesty so when your project is complete you will be pleased both emotionally and financially.

Ann Robinson and Annie V. Schwemmer are the Principal Architects and co-founders of a residential architectural firm focused on life-changing remodeling designs at RenovationDesignGroup.com. Send comments or questions to ask@RenovationDesignGroup.com

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