For many
individuals, adding a pool, and an addition
to the home, or making repairs, requires
the use of a mortgage. The borrower should
consider the following options:
Depending on the required loan amount, a
home-equity line of credit (HELOC) may be
the most cost-effective option. Home equity
lines, typically carry lower interest rates
as the loan is under 75% of the home value.
A fixed rate loan program is available at
higher interest rates and is available to
90% of the homes value. For this reason,
home equity lines and some fixed rate secondary
financing work best for smaller loan amounts
that will be paid off in a reasonably short
period of time.
Borrowers who need larger loan amounts and
who intend to keep the outstanding balance
for a longer period of time may want to
consider refinancing their first mortgage,
paying off the existing balance and increasing
the loan in an amount sufficient to pay
for the improvements. While this option
will most likely require the borrower to
pay closing costs, the benefit of this option
is usually a lower interest rate over an
extended period of time than is typically
offered by other Home Improvement loans.
Construction or Construction/Permanent loans
are best suited for extensive renovations
requiring multiple draws to contractors
or laborers. Draws are usually set up monthly
and are subject to at least a 10% holdback
of funds in accordance with “construction
liens” laws. In addition, many lenders
prefer to fund these draws on a cost-to-complete
formula where the funding program insures
that there is always enough money remaining
after each draw to complete the project
in the event of a problem or default. Each
time the contractor requires a draw an architect,
engineer or appraiser is called in to determine
the value of the work in place and the remaining
work to be completed. The lender will use
this information to determine the amount
of the draw that will be advanced. These
loans are usually set at a float rate of
1 to 3 above bank prime for non-private
funding and may contain a permanent (take-out)
mortgage which comes into effect once the
construction is complete and beyond the
45 day construction liens period.
In many instances, the lender will require
plans and specification for improvements.
Lenders will also require an appraisal of
the subject property reflecting the value
of the improvements in the new valuation.
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