Working toward your dream home
Are you thinking about renovating your home? Chances are, it wasn’t perfect when you bought it. Maybe you want to update an ancient kitchen or add a bedroom for that baby you plan to have. Even if you just bought your home, maybe it needs major repairs, the expense of which wasn’t quite clear before you closed! These things happen.
Whatever the case, renovation has many facets that you’ll want to investigate first.
Here’s what we’re going to cover:
- How to pay for your project
- Projects that build equity (or don’t)
- Renovation must-dos
- 10 common renovation mistakes
- Home insurance issues to be aware of
Paying for Your Project
What’s the smartest way to pay for a renovation? It’s always best to avoid debt and pay in cash — if your project can wait. Put yourself on a savings schedule and be patient (sigh). But don’t delay critical repairs, like a leaky roof, for too long. That could cost more than borrowing. When in doubt about the expiration date on something like the roof or anything that keeps the house from falling down, ask a pro (such as a licensed contractor or home inspector).
Avoid financing improvements that don’t last longer than it takes to pay them off. You wouldn’t want to take out a 30-year loan to paint your house, for example. The interest would make that crazy expensive, and it would be time to repaint long before you paid for the first job!
A homeownership advisor can help you explore all your funding options. The best choice depends on how much you need and how much equity you have.
Grants and special programs
Many cities and nonprofits offer grants or low-cost loans for repairs and rehab, so it’s smart to see what’s available in your area before taking on a traditional bank loan. Depending on your income, the type of house, and other variables, you might qualify.
Some cities offer incentives to renovate homes in historic districts (one place to start: PreservationDirectory.com). Are you disabled? Many programs help with home modifications for medical or disability reasons (such projects are also tax deductible).
A homeownership advisor can save you a lot of time on tracking down these kinds of alternatives.
Zero Percent Credit Card
You probably never expected us to suggest taking on new credit card debt. But if you’re the financially disciplined type (know thyself!) and your project is on the small side, an introductory card deal amounts to an easy, interest-free loan.
Before you commit, however, scour the fine print for hidden fees. Then be sure to treat it like a loan: stick to a payment schedule and kill the balance before the offer ends. If you don’t, you might be charged all the back interest.
Another thing to consider: How concerned are you about your credit score at the moment? The credit inquiry that the application will require can lower your FICO score for a while, and so can carrying a big credit card balance, even though it’s not overdue. Details at Bankrate.
Home Equity Line of Credit (HELOC)
A HELOC works kind of like a credit card, but it’s secured with your home. Which means you risk foreclosure if you fall behind on payments. Also, low starter interest rates are usually adjustable — they go up later. What’s nice is that you don't have to take out (and pay interest on) a big lump sum all at once; you borrow as you go. Learn more in Smart Start’s lesson on home equity.
Home Equity Loan
Also called a second mortgage. It’s secured with your home, so foreclosure is a risk if you fall behind. The rate is fixed but tends to be higher than for a first mortgage or a refinance. On the upside, it’s less complicated than refinancing, usually less expensive than a line of credit, and the interest might be tax deductible. Learn more in Smart Start’s lesson on home equity.
HUD Title 1 Loan
Equity? What equity? New homeowners often have little or none. The Department of Housing and Urban Development’s Title 1 Home Improvement Loan Program (also known as FHA Title 1) can help. Because the loans are government insured, they’re easier to qualify for. And they can be used for all kinds of improvements — even for appliances that are built into the house (not freestanding). What you can’t use them for is luxuries, like swimming pools or outdoor fireplaces.
The program enables fixed-rate loans of up to $25,000 that you can take as long as 20 years to pay back. If the loan is for less than $7,500, you won’t have to put your home up as collateral. Requirements, terms, and interest rates can vary from lender to lender. Find a HUD-approved lender at HUD.gov.
If you’re doing a big, expensive remodel, refinancing and converting equity to cash might be best because you’ll probably get the lowest interest rate. And the interest might tax deductible — consult a tax preparer. Learn more in Smart Start’s lesson on refinancing.
If you’re short on equity, HUD to the rescue again. It has two loan programs for refinance-and-rehab situations: the “203(k)” for major work (at least $5,000) and the “streamlined 203(k),” which has no minimum amount and stops at $35,000. As with Title 1, because they’re government insured, these loans are easier to qualify for. Requirements, terms, and interest rates can vary from lender to lender. Find a HUD-approved lender at HUD.gov.
An Eye on Equity
Without a doubt, there’s value in renovations that make your home a better fit for you, especially if you plan to stay put. Still, it’s worth researching what a major project might do to the market value of your home. Very few projects will pay back 100 percent of what they cost, but some are definitely more market-smart than others. The impact depends on many factors, including your neighborhood, where in the country you live, the quality of the materials, and how soon you sell.
Here are some basics to get you started.
Remember, good maintenance always counts most. Stone countertops lose their appeal if the roof is leaking. But certain improvements are more likely to add value to your home than others. Here are some good bets:
- A new roof — it’s an expensive load off any buyer’s mind, especially in weather-beaten climates
- Installing hardwood floors or refinishing existing ones
- Upgrading insulation
- New siding
- Enlarging or improving outdoor living spaces
- A kitchen upgrade
- A bigger bathroom (or, if you have only one, a second bathroom)
- New windows
Some projects, no matter how appealing to you and your family, can be liabilities when it comes time to sell.
- Swimming pool, unless you live in a place where it’s a must-have
- A garage conversion — it’s usually better to finish the basement or attic
- Eliminating a bedroom or bathroom to enlarge another space
- Renovating beyond the price range of the neighborhood
- Quirky stuff … like removing the stove because you’re a committed rawist
Research. Good resource: the National Association of the Remodeling Industry. At nari.org, you’ll find step-by-step info and tips on the renovation process, from the dreaming phase to wrapping up.
Think long-term. What do you need from your home 5 or 10 years from now? Will you even still be there? Will your family expand?
Budget, budget, budget. It’s so easy to underestimate. Go into detail, then take whatever figure you arrive at and add 15 or (for older homes) 20 percent. Unexpected problems are the norm, not the exception.
Due diligence on your contractor. One of your most important decisions will be choosing a contractor (or choosing to DIY). Check out our six-step guide to general contractors.
Know your materials. The materials you choose can make or break your project. There are big differences in quality, style, and cost. Give yourself plenty of time to explore your options.
Get permits. Working without a permit can have terrible consequences. For example, if something goes wrong, your homeowners insurance won’t cover it. So even if a project seems inconsequential, call your local building inspector’s office to see whether you need any permits. If you’re working with a contractor, confirm that they’ve pulled the permits.
Prep and pare. Any significant remodel is a recipe for chaos. Things will go more smoothly if you organize, pare down (the look you’re going for might benefit from that too), empty the room or rooms you’ll be working on, and plan your workarounds well in advance. Check out the tips at Houzz.
Be safe. If you DIY, protect yourself with goggles, gloves, good boots that nails and sharp objects won’t easily penetrate, earplugs around loud tools, and good ladder habits. More in Smart Start’s lesson on home safety.
10 Common Mistakes
A lot of these have something in common: the temptation to cut corners, whether to save money or because you’re just so excited to get from “before” to “after.”
- Measuring wrong, especially for kitchen cabinets
- Skimping on practical, sometimes invisible things, like a floor drain in the new laundry room
- Buying cheap materials
- Skimping on prep work, which, while often tedious, is key to making it all turn out beautiful and very possibly saving time and money in the end
- Not having a plan and then getting stuck
- Buying stuff like appliances before planning and measuring
- Using the wrong tool, which can wreck the tool, wreck your project, and send you to your first-aid kit or your nearest emergency room
- Falling for too-trendy styles and materials — go with quality and sustainability first
- Scrimping by not moving pipes or wiring, which might not cost as much as you think and could make a huge difference in the room’s functionality
- Failing to anticipate the chaos
Before you launch a big renovation, talk to your insurer about whether you’ll need extra coverage during and after.
Are you protected during the project?
Make sure you’re covered if disaster strikes partway through. Sometimes, you can increase your coverage incrementally as the project progresses. Are you storing furniture and belongings in a container or offsite? Make sure you’re still covered. If it’s a DIY job, are family and friends helping out? You might want to boost your liability coverage. These are just a few examples — talk it over with your insurance agent.
Also confirm that your contractor and subcontractors are properly insured for liability and workers’ compensation.
Will you need more coverage after?
If your project increases value or liability, that's a yes. For example, home business space can change your coverage. A pool, deck, patio, or hot tub can both add value to your home and increase liability.
Can you save on your premium?
The good news is some projects can lower your premium.
- A new roof, especially if you live in a severe weather zone and spring for upgrades like hurricane straps
- Electrical, heating, and plumbing updates
- Home monitoring systems, including hard-wired smoke/CO alarms and security systems
Update your home inventory
Document the value you’ve added with photos and receipts. Don’t have a home inventory yet? Review “Homeowners Insurance 201.”