Finance Your Home Renovation

How You Can Finance Your Home Renovation

Outdated kitchen. Overrun backyard. Unusable basement space. If you have a home renovation project on the mind, the first thing you have to consider is how you are going to finance it. Here are the most common options to make your dreams become a reality.

Cash. Paying in cash is the most straightforward financing option, just save until you have enough money to cover the expenses. This will help eliminate spending outside your budget; however, it can also extend your timeline.

Mortgage Refinance. If you’ve been making payments on your home for a few years and your interest rate is higher than current market rates, you may be eligible for a mortgage refinance, reducing your payments and freeing up some money.

Cash-Out Refinance. You can tap into your home equity and borrow up to 80 percent of your home’s value to pay off your current mortgage plus take out more cash to cover the renovations. This option is encouraged only when you’re making improvements that will increase the value of your home, as it can add a lot of interest and fees.

Home Equity. Getting a home equity line of credit allows you to borrow money against the value of your home. You receive usually up to 80 percent of your home’s value, minus the amount of your loan.

Retirement Funds. Homeowners can consider pulling money from a 401K or IRA account, even though they aren’t specifically meant to cover a home renovation. This option might incur additional penalties or tax payments, but may be worth it when making improvements that will benefit them financially in the long run.

When It Makes Sense to Refinance

Refinancing your mortgage is something most homeowners consider at least once throughout the lifespan of their home loan. It allows you to pay off your previous loan by applying for a new one that has better financial advantages. While there are many good reasons to refinance, here are five common ones.

• Scoring a lower interest rate. The number one reason homeowners decide to refinance is to secure a lower interest rate on their mortgage. Not only does this save you money in the long run and decrease your monthly payment, but you can start building equity in your home sooner.

• Using an improved credit score. Even if interest rates have not dropped in the market, if you’ve improved your credit score over the last few years, you may be able to reduce your mortgage rate.

• Shortening the loan’s term. If interest rates are decreasing, there is a chance you may be able to get a shorter loan term with little to no change in your monthly payment, allowing you to pay off your loan sooner.

• Switching from an adjustable rate to a fixed rate. If you chose an adjustable-rate mortgage with great introductory rates when you initially financed your home, that rate may increase significantly over the years. By switching to a fixed rate while interest rates are low, you can protect yourself from future increases.

• Cashing out home equity. If there is a big purchase or payment on the horizon, such as funding a wedding or going back to school, your best option may be to use the equity you’ve built in your home to borrow money at a lower cost.

Dispelling Refinancing Myths

“Refinancing” is a scary word for many people, but that shouldn’t be the case for you. For many homeowners, refinancing can not only lower your monthly payments and help with your monthly budget, but it can save you thousands of dollars in the long run.

YOU’RE NOT TOO LATE.

For years now, we’ve been hearing that interest rates will be on the rise, and although there have been some small increases, you’re still in a great position to drastically lower your interest rate. The general rule is if your mortgage interest rate is more than one percent above the current market rate, you should consider refinancing.

IT’S NOT TOO TIME CONSUMING.

Don’t brush off refinancing just because it seems like a long and daunting process. An informational call with a lender to see how rates compare will only take a few minutes. There are also some programs for streamlining the application process. And besides, isn’t the amount of money you could save worth the time and effort?

ARMS CAN BE REFINANCED, TOO.

Seeing your Adjustable Rate Mortgage (ARM) increase after the introductory period can be incredibly stressful and place a squeeze on your budget. Many people assume they’re stuck, but ARMs can be refinanced, just like fixed-rate mortgages. You can even switch to a shorter term fixed-rate mortgage, such as 15 or 23 years. The longer you’re planning to stay in the home, the more sense it makes to look into refinancing.

How Much Are Closing Costs?

When you get a mortgage to buy a home, you’ll have to pay closing costs: These fees, paid to third parties to help facilitate the sale of a home, typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, you can expect the amount to run anywhere from $5,000 to $17,500.

Now that you have a sense of the ballpark numbers, here’s everything home buyers and home sellers need to know about closing costs.

Who pays closing costs, and when?

After saving up to purchase a new home, getting pre-approved, and making a down payment, it’s hard for buyers to accept that they’ll have additional out-of-pocket expenses. Some good news, then, is that both buyers and sellers typically pitch in to cover closing costs, although buyers shoulder the lion’s share of the load (3% to 4% of the home’s price) compared with sellers (1% to 3%). And while some expenses must be paid upfront before the home is officially sold (e.g., the home inspection fee when the service is rendered), and others, like property taxes and homeowners insurance, are recurring, most are paid at the end, when you close on the home and the keys exchange hands.

What can buyers expect to pay?

Home buyers pay the majority of these costs, since many of these fees are associated with the mortgage.

Here are some of the fees home buyers should brace themselves to pay:

• A loan amount origination fee, which lenders charge for processing the paperwork for your loan.

• A fee for running your credit report.

• A fee to underwrite and assess your credit worthiness.

• A fee for the appraisal of the home you hope to own to make sure its value matches the size of the loan you want.

• A fee for the home inspection, which checks the home for potential problems from cracks in the foundation to a leaky roof.

• A fee for a title search to unearth any liens on the property that could interfere with your ownership of it. Title insurance protects the lender and buyer from claims against the home and property.

• A survey fee if it’s a single-family home or town home (but not condos)

• Taxes, also called stamp taxes, on the money you’ve borrowed for your home loan.

• Private mortgage insurance is an additional fee that buyers can expect to pay if they can’t come up with a down payment that’s 20% of the purchase price.

• Discount points, or mortgage points, are fees paid right to the mortgage lender in exchange for a lower interest rate. One point is valued at 1% of your mortgage total. It may seem like lot to pay upfront, but doing so will lower your monthly mortgage payment.

• One-time fees may also include: document recording fees for the deed and mortgage, buyers’ attorney fees, real estate agent commission.

Buyers should also account for the following:

• An escrow deposit, managed by a neutral third-party escrow officer, covering typically two months of prepaid property taxes and mortgage insurance payments

How much can sellers expect to pay?

Here are the fees that sellers are typically responsible for:

• A closing fee, paid to the title insurance company or attorney’s office where everyone meets to close on the home

• Taxes on the home sale

• A fee for an attorney, if the home seller has one

• A fee for transferring the title to the new owner

While this doesn’t seem like much compared with what future homeowners have to cough up, keep in mind that sellers typically pay all real estate agents commissions, which amount to 4% to 7% of the home’s sales price. So, no one sneaks through a home closing scot-free.

Why there’s no such thing as typical closing costs

The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements—and fees—for the sale of a home.

“If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up, like so-called ‘flip taxes’ that condos charge sellers.”

Texas has the highest closing costs in the country, according to Bankrate.com. Nevada has the lowest.

How to estimate closing costs

To estimate these, plug your numbers into an online closing costs calculator, or ask your real estate agent, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile, sellers should receive similar documents from their real estate agent, outlining their own costs.)

Word to the wise: “Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted,” says Ameer. Errors can and do creep in, and since you’re already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.

How to reduce closing costs

While there’s no way for you to outright dodge these fees, there are ways that homeowners can pay vastly less.

Some closing costs are negotiable: attorney fees, commission rates, recording costs, and messenger fees. Check your lender’s good faith estimate (GFE) for an itemized list of fees. You can also use your GFE to comparison shop with other lenders.

Here are some ways to circumvent the added expenses:

1. Look for a loyalty program. Some banks offer help with their closing costs for buyers if they use the bank to finance their purchase. Bank of America, for instance, offers reduced origination fees for “Preferred Rewards” members. It’s the bank’s way of offering a reward for being a customer.

2. Close at the end the month. One of the simplest ways for you to reduce your closing costs as a buyer is to schedule your closing at the end of the month. If you close at the beginning of the month, say March 6, you have to pay the per diem interest from the 5th to the 30th. But if you close on the 29th, you pay for only one day of interest.

3. Get the seller to pay. Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing-cost credit. It’s a way to seal the deal—and a tax-deductible expense for the seller. Don’t expect this to happen much in hot markets where inventory is scarce (which is almost everywhere these days).

4. Wrap the closing costs into the loan. You’re already borrowing probably hundreds of thousands of dollars—why not tack on a few thousand more? Mortgage lenders charge more for this, but if you don’t have the cash, it’s a way to get into the house with less cash upfront. You may want to consider a no closing cost mortgage. With this type of mortgage loan, the lender covers the fees, but you’ll be paying a higher interest rate for the duration of the loan, which will mean larger mortgage payments.

5. Join the army. Military members have closing-cost benefits that are often overlooked. Service members and veterans may qualify for funds to help them purchase a home. These benefits are not limited to the VA loan. The key is to do the necessary research to make sure you get everything you are entitled to. Visit usmhaf.org for more information.

6. Join a union. AFL-CIO members can get help purchasing or refinancing a home with closing-cost discounts and rebates from the Union Plus mortgage program.

7. Apply for an FHA loan. Americans with lower incomes can apply for an FHA (Federal Housing Administration) loan, a government-backed mortgage. Buyers can get a bit of help from interested third parties including real estate agents, sellers, and mortgage brokers, who can pay up to 6% of the new loan amount. FHA loans are also a bit more lax on credit scores. Borrowers whose credit score is 580 or higher are likely to qualify, whereas traditional lenders require a credit report to reflect 620 or higher.

How to Pack Like a Pro

Plan ahead. Develop a master to-do list so you won’t forget something critical heading into moving day. This will also help you create an estimate of moving time and costs.

Discard items you no longer want or need. Ask yourself how frequently you use an item and how you’d feel if you no longer had it. Sort unwanted items into “garage sale,” “donate,” and “recycle” piles.

Pack similar items together. It will make your life easier when it's time to unpack.

Decide what you want to move on your own. Precious items such as family photos, valuable breakables, or must-haves during the move should probably stay with you. Pack a moving day bag with a small first-aid kit, snacks, and other items you may need before unpacking your “Open First” box.

Know what your movers will take. Many movers won’t take plants or liquids. Check with them about other items so you can plan to pack them yourself.

Put heavy items in small boxes. Try to keep the weight of each box under 50 pounds.

Don’t overpack boxes. It increases the likelihood that items inside the box will break.

Wrap fragile items separately. Pad bottoms and sides of boxes and, if necessary, purchase bubble-wrap or other packing materials from moving stores. Secure plants in boxes with air holes.

Label every box on all sides. You never know how they’ll be stacked. Also, use color-coded labels to indicate which room each box should go in, coordinating with a color-coded floor plan for the movers.

Keep moving documents together in a file, either in your moving day bag or online.
Include vital contact information, the driver’s name, the van’s license plate, and the company’s number.

Print out a map and directions for movers and helpers. Make several copies, and highlight the route. Include your cell phone number on the map.

Back up computer files on the cloud. Alternatively, you can keep a physical backup on an external hard drive offsite.

Inspect each box and piece of furniture as soon as it arrives. Ahead of time, ensure your moving company has a relatively painless process for reporting damages.

Holding a Successful Garage Sale

Garage sales can be a great way to get rid of clutter and earn a little extra cash before you move. But make sure you plan ahead; they can take on a life of their own.

Don’t wait until the last minute.
Depending on how long you’ve lived in your home and how much stuff you want to sell, planning a garage sale can take a lot of time and energy. And that’s on top of the effort of putting your home on the market!

Contact your local government.
Most municipalities will require you to obtain a permit in order to hold a garage sale. They’re often free or cheap, but the fines for neglecting to obtain one can be hefty.

See if neighbors want to join in.
You can turn your garage sale into a block-wide event and lure more shoppers. However, a permit may be necessary for each home owner, even if it’s a group event.

Schedule the sale.
Sales on Saturdays and Sundays will generate the most traffic, especially if the weather cooperates. Start the sale early — 8 or 9 a.m. is best — and be ready for early birds.

Advertise.
Place an ad in the newspaper, free classified papers, and websites, including the date(s), time, and address of the garage sale. Add information about what will be available, such as kids’ clothes, furniture, or special equipment. On the day of the sale, use balloons and signs with prominent arrows to grab attention.

Price your goods.
Clearly mark rounded prices (50 cents, 3 for $1, or $5, for example) with easily removable stickers.

If it’s junk, recycle or donate it.
If it’s truly garbage, throw it away or place it in a freebie bin. Don’t try to sell broken appliances, and have an electrical outlet nearby in case a customer wants to try plugging something in.

Display items nicely.
Organize by category, and don’t make customers dig through boxes.

Stock up on supplies.
Having a stock of old shopping bags that can be reused encourages people to buy more items. Newspapers are handy for wrapping fragile goods.

Manage your money.
Obtain ample change for your cashbox, and have a calculator on hand. Assign one person to man the “register,” keeping a tally of what was purchased and for how much.