How do people pay for home improvements?

September 21, 2009 · Posted in News For Homebuyers

I was recently asked this question and these are the ways I am aware that folks can pay for home improvements.

Cash – With out a doubt the easiest way. If you have the cash odds are it will be your best option, but not always.
Contractor Financing – This would be when the contractor actually funds the project and allows you to pay for the work over time. I don’t know too many…(any) contractors that are in a position or willing to do this.
Credit Cards – North of 10% interest rates. Unless you anticipate being able to pay the cards off quickly I would venture to say that is a really bad idea.
Home Equity Loan – A few years ago this was the preferred method. Combine the decreasing home values with equity guidelines decreasing the Combined Loan to Value ratios 100% down to 80-85% max. Currently few if any folks actually have the equity in there homes to obtain an equity loan.

The 1st four sources have some common problems with paying for improvements on a purchase transaction. If the repairs are need to have vs. nice to have, the repairs will need to be made prior to closing on the purchase. Paying to repair a property before you own it is probably not the best idea. Fannie Mae, Freddie Mac, FHA & VA all have minimum property standards that must be met prior to the loan closing, unless you are obtaining Renovation Financing. Home equity financing has the added hurdle of being based on the current value of the property.

Purchase or Refinance & Renovation Loans – Unlike equity loans or a regular first mortgage loan, purchase/refinance and renovate loans base the loan amount and your down payment off of the after improved value rather than the current value. This enables you to tap into potential equity.