How to Finance a Remodel or Renovation

Once you have made the decision to update your kitchen or build that room addition, the next step is getting your financing.

Instructions

Difficulty: Moderate

1. Calculate how much equity you have in your home to determine if you have enough to cover the cost of your renovation. Add together the balances of any home mortgages you currently have and subtract the total from the value of your home. The result will tell you approximately how much equity you have to work with. If you don't have an idea of your home's value, you can use the tax assessed value available on most county auditor's websites.
2. Determine how much money you want to borrow and calculate what your loan to value would be. Add the new loan amount to any outstanding mortgages you currently have on your home and divide the total into your property value. The result gives you what your loan to value percentage will be after you get the new loan. This figure is important as it could affect the interest rate you pay.
3. Contact at least three lenders and ask about the rates and terms they offer for equity loans. The best place to start is a lender you already have a relationship with as they often waive fees or offer better rates for existing customers. Have the information you calculated regarding your loan to value and the amount of your available equity ready as these components affect the terms of your loan.
4. Choose a lender based on your research, and sit down to discuss the various equity products available to you. If you choose a revolving line of credit, make sure you understand the terms completely. Know what happens when the draw period ends. Go over the interest calculations and various fees thoroughly.
5. Try to reduce the amount of fees you pay by asking the bank to waive the appraisal requirement in favor of using a tax assessment as a property value. If you have abundant equity, lenders are generally willing to do this.
6. Keep your contractor informed of the timing of your financing so they'll be prepared to start as soon as you give them the go ahead.

Tips & Warnings

• Major renovations could dramatically increase the value of a home which should be considered in the loan to value calculation. Make sure your lender is giving you credit for the remodel when determining the loan to value to ensure you get the best rate.