Financing Your Remodel

By Vicky Katz Whitaker

June 19, 2009 5 min read


Is it worth it to update your home during tough times?

Vicky Katz Whitaker

Creators News Service

You've heard it all before. Your house is too small, too old and the price is too high in a real estate market that's in meltdown mode.

What can you do about it? Plenty, experts say -- if you're willing to take a gamble that the improvements you make will either make your house more livable now or more sellable down the line.

"With low rates and targeted improvements, home remodeling projects can be a great way to create the necessary environment one desires if you can't sell or afford to purchase your dream home at the present time," said Geoffrey Ruttenberg, president and CEO of The Brixton Group in Chicago who has had 20 years of experience in real estate. He added that he's seen a recent spike in the number of custom home improvement, renovation and remodeling requests.

It's a tough decision, added Matt Plaskoff, owner of Plaskoff Construction in Woodland Hills, Calif. and One Week Bath in Gardena, Calif., as well as the former lead construction consultant for "Extreme Makeover: Home Edition."

"There are a couple of factors that should guide your decision," he said, such as how long you plan to stay in the home. "The answer to that question will guide your decision on how much to invest and in which types of projects."

Plaskoff said the biggest way to avoid what could be a costly mistake is to take into consideration what your home is worth today, pre-remodeling. "What would you pay for a home in the same neighborhood with the features and upgrades you're contemplating?" he asked. "Do the math and it will tell you whether it's a wise investment."

Diann Patton, a sales manager for Coldwell Banker Grass Roots Realty in Grass Valley, Calif., has a similar take. "If minor cosmetic changes to the home can be made to help bring the value up, then by all means consider a light remodel. If you want to move within the next few years, you must make sure that you are not over-remodeling. If you love the current neighborhood of your home, then remodeling may be just the right thing for you."

Financing a project can be tricky, warned Los Angeles real estate attorney Robyn Roth, co-author of "Remodel This! A Woman's Guide to Planning and Surviving the Madness of a Home Renovation" ($15, Perigee Trade). Roth, who flips houses on the side, said it's usually better to pay for your job with cash on hand.

"Home equity lines of credit have always been a popular way to pay for a remodel, but today there are some unexpected pitfalls of which to be aware," she said. "Some banks reduce the amount of the line before it's all been borrowed as the value of a home falls -- and therefore the equity available to borrow against. So while you may not want to borrow it all now because interest accrues only on amounts you've actually borrowed, you might want to borrow everything up front in order to make sure that you'll have sufficient loan funds to finish your project."

Many people refinance their first mortgage and home equity line once the job is done to consolidate their loans and avoid the fluctuating loan rates of a home equity line. But with falling home prices and an uncertain lending environment, it may be difficult to secure. "You might be stuck with the home equity line for longer than you thought," Roth said.

Small projects like installing a new high efficiency furnace can usually be financed through a short-term revolving or fixed-term loan. A $3,000 to $5,000 outlay can be offset by the energy savings you'll receive in the future.

But for larger projects, look to the expertise of builders, realty experts, architects, assessors, your accountant and even the local utility company. "As you interview contractors, ask for cost estimates so you can start to get a sense of what you can afford to do," Roth said. "But remember: Cost estimates aren't bids! You must get a detailed bid, and have it signed by both you and the contractor as a commitment."

Even if you have a detailed bid, make sure that you have a 15 to 25 percent budget cushion that will cover last-minute changes or unforeseen construction problems.

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