Find funds for your project.

Springtime is warming the air and the days are getting longer. It is a time when those of us who own homes are urged to start actually doing something about the home improvement projects which were only dreams during the winter. We could have in mind a major project like a room addition, new garage, or replacing the roof, or we might be envisioning something smaller such as remodeling the kitchen or replacing the carpet. Regardless of the scope of the project, planning always must include decisions on how to pay for the work to be completed.

Certainly writing a check for payment of the work and materials is the easiest way to handle the costs of any home improvement project. Unfortunately, few people have the cash resources readily available to cover such expenditures. Another alternative for project financing may be through use of personal credit cards, which provide easy access to funds, but at interest rates which may range from 14% to 18%. Credit card limits may also not be sufficient to fund the project costs, and any interest paid during the time the funds are outstanding cannot be taken as a deduction for income tax purposes.

A third way to finance improvements to a personal residence is the old standby home improvement loan which involves taking out a second Deed of Trust (mortgage) loan in a specified amount, for a specific time period, and for the single purpose identified. Generally the loan requires completion of a mortgage application, a formal property appraisal, a set monthly payment for a specific number of months and a specific maturity date at which time the note is paid in full.

While the above finance methods may fulfill the immediate needs of a homeowner for the specific purpose of completing a planned home improvement project, the relatively new finance program commonly referred to as a "Home Equity Line of Credit," (HELOC) may in fact be the best and most flexible financing alternative. Not only can the HELOC be used to finance the planned home improvement project, but after paying down, or paying off the obligation incurred to complete the improvement project, the HELOC remains available as an open line of credit. The line is available to be used at the borrower's discretion for such purposes as purchasing an automobile, funding college expenses, taking that 25th Anniversary vacation or for any other need which a homeowner may identify.

In fact, HELOC financing is literally the most flexible form of borrowing available today for homeowners! And, many lenders have simplified the process for making application to the point that the borrower need not dread the application and approval process. Documentation required, in addition to the relatively simple loan application' may consist of nothing other than the lending institution receiving a copy of the applicants most recent personal tax return, property Notice of Assessed Valuation, and legal description of the property on which the applicants residence is built. The lending institution will generally obtain a credit bureau report summarizing past credit history, inspect the property pledged as collateral, and do a general evaluation of the borrower's ability to make payments as projected with credit approval communicated to the applicant within a few hours to a few days. Costs incurred by the borrower for establishing the HELOC are very reasonable, generally ranging from $0 to $300.

 

Benefits associated with borrowing through establishment of a Home Equity Line of Credit are:

Total flexibility to fund a loan up to the credit limit simply by writing a check on the home equity line.

Minimum monthly payments are generally l to l l /2% of the monthly outstanding loan principal balance ($10,000 outstanding balance, monthly payment at 1.% would be $100 )

The amount outstanding on the line may move up and down as determined by the needs of the borrower.

Interest rate on the line is generally less than the typical rate for credit cards or second deed of trust fixed term loans. Rates are generally variable tied to the national prime rate of interest plus some margin over that prime rate. (As an example, if the interest rate was prime plus 11/4%, the rate today would be 9.75%Annual Percentage Rate)

Closing costs on smaller lines (generally to $50,000) are reasonable with some lenders waiving all fees.

Interest paid on the line of credit is generally tax deductible as home mortgage interest. (your tax consultant can tell you if it is deductible)

The term of the credit for use as a line is generally about 10 years. After that time, most HELOC programs have a provision that they go into full repayment scheduled over the next 10 years.

In this time of significant appreciation in residential property values, many homeowners may have significant home equity which can be used to support a Home Equity line of credit borrowing. While some lenders may extend HELOC financing to 100% of the equity value of a person's residence, a conservative figure of 80% is often used when determining the size of a HELOC line. For you to determine the equity available for securing a HELOC, first determining the 80% valuation of the residence property, then deduct the amount of any existing first mortgage obligation. The remaining amount of value may support a credit line after also taking into account the borrowers ability to make estimated maximum payments.

As an example for calculating the limit of a HELOC line based on equity values, assume a personal residence property has a market value** of $135,000

Multiply the market value by 80% (Collateral Value) Property value available to support debt

x.80

$108,000

Deduct: existing First Mortgage balance outstanding

$ 64,000

Equity value available to support a HELOC line

$ 44,000

(Most lenders have a minimum HELOC credit limit which is commonly $5,000 to $10,000)

**Market value is the value the residence may reasonably be expected to sell for in the current market. If the market value is not known, a conservative figure to use may be the assessed valuation as reflected on the county tax rolls for the property. The valuation will be on the annual Notice of Assessed Valuation as provided by the county.

While some homeowners may feel the use of the equity in a personal residence to support a HELOC is unwise, the issue is really that of satisfying oneself that they are prudent in their personal credit habits and disciplined when it comes to borrowing money. Certainly in this age of easy credit, (we all get credit card solicitations everyday), it's wise to be cautious when making decisions to borrow money. However, with al1 me benefits associated with a HELOC credit, such a financing approach should be viewed as a flexible tool for managing a homeowners borrowing needs, and who knows, you may end up with that new kitchen, carpeting or even a new automobile in the process.