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How to Plan and Finance Home Improvements

Thursday, September 15, 2016

Once the thrill of becoming a homeowner wears off, reality sets in. Your home is likely to be the biggest single investment you'll make in your lifetime. If you want to preserve its value over time, that means doing regular maintenance.

Know what to expect

Mortgage finance company Freddie Mac has a useful checklist to help you plan for regular upkeep, and you should also expect periodically to do larger home improvement projects like replacing the roof.

Keep a budget

Predicting maintenance costs is tricky, but some experts suggest setting an annual budget of 1% to 4% of your home's value for these expenses. Some homeowners divide that number by 12 to figure out how much they need to save each month to prepare for big maintenance bills when they crop up.

Do it yourself

Learning to do basic tasks such as landscaping, painting or fixing a toilet can save a lot of money over time. Some hardware stores and home improvement centers offer classes to boost your skills.

Home equity financing

Although you may be able to pay out of pocket for minor things such as gutter cleaning, perennials for the garden or a new kitchen faucet, you might not have the cash on hand for more costly repairs. It's only a matter of time before you get hit with something big, such as replacing the furnace, digging a new sewer line or repaving the driveway. If you want to finance repairs or improvements using equity you've built up in your home, here are some alternatives for tapping it.

  • Cash-out refinancing

Some homeowners have paid for big repair bills by refinancing the mortgage and pulling money out of the property in the process. You may find a lower interest rate while you're at it, but beware of resetting the clock with a new 30-year loan late in your career. If possible, you want to pay off the mortgage before retirement.

  • Home equity line of credit

Widely known as a HELOC, this provides a certain amount of credit secured by your home. Borrowers can withdraw funds when needed and pay interest only on the amount used. HELOCs generally have variable interest rates that can move up and down depending on market conditions. These are good for ongoing projects with unpredictable costs.

  • Home equity loan

Unlike a HELOC, a home equity loan typically gives you a lump sum upfront at a fixed interest rate. The loan term generally ranges from 5 to 15 years, and the lender may require your equity in the house to be at least 20% of its market value. That means your primary mortgage plus your home equity loan can't add up to more than 80% of what the house would fetch in a sale.

The upside of borrowing against home equity is that the interest on the debt can be tax deductible, like mortgage interest. The downsides are that it can be an expensive process, with fees for an appraisal and a title search, for instance, and it puts your home at risk of foreclosure if you fail to pay.

Other types of financing

Government lending programs may be available to help you pay for upkeep. The Federal Housing Administration insures Title 1 loans offered through banks and credit unions, for instance. Search the websites of your state and local government to see whether loans to homeowners facing pricey home improvement projects are offered.

Try to save regularly so you'll be prepared for must-do home maintenance needs when they pop up. Diligent saving may let you take on optional renovations that make living in your house more enjoyable. But if your savings fall short, there are alternatives for financing home projects. However you choose to pay for it, take good care of your house so you can enjoy it for many years to come.

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