Financing & Rebates
FINANCING – What You Should Know
With interest rates continuing to fall, many Truckee/Tahoe residents believe this is an ideal time to consider making home improvements that add value to their homes, enhance energy efficiency (going Green), or simply add more living space.
And since new residential construction is at a virtual standstill, it is also a good time to take advantage of the lull which can result in significantly lower construction costs.
Indeed, while on the surface these all appear to be good reasons to consider making a home improvement, there is one overriding consideration - how to finance a remodeling project.
Questions to Ask
Regardless of which CATT (Contractors Association of Truckee Tahoe) member you choose to use, you will of course, need some financing. That means you are well advised to ask yourself some simple questions ...
- Will it increase the value of my home?
- How long will it take to complete the project?
- How much is it going to cost altogether? and
- Do I need the money for anything beyond this particular set of home improvements?
Options for the Homeowner
Your answers will determine which type of financing option is best—a home improvement loan, borrowing on your 401 (k), a Title 1 Loan, a home equity loan, a home equity line of credit, or some other alternative. Because there is no one option that is appropriate for everyone, you should sit down with your local banker and your tax advisor. Each alternative carries different tax implications. Rather than present a compendium of information on these and other options, let's briefly review the most popular—using the equity in your home.
Using the equity in your home is one the smartest options available. Since mortgage and home equity interest rates are traditionally lower than most other forms of credit, that lower interest rate can lower the cost of your remodel. You can potentially deduct the interest payments from your taxes also, lowering your cost even further. Be sure to consult your tax advisor, however, regarding tax deductibility.
Let's look at two types of home equity loans — term (closed-end home equity loans), and lines of credit (HELOC). Both are usually referred to as second mortgages, because they're secured by your property (your property is the collateral for the loan). Home equity loans and lines of credit often have a shorter term than first mortgages.
Option 1 - A Closed-End Home Equity Loan
A Closed-End Home Equity Loan offers:
- Lower monthly obligations
- Possible tax deductions
- Lower interest rates vs. credit cards
- Simple interest vs. compounding interest
- Increase cash flow
- Fast money
- Closed-end Home Equity Loan rates vs. Credit Card rates
- Line of Credit Benefits
A closed-end home equity loan, or term loan, is provided to you as a one-time lump sum that is paid off over a set period of time, with a fixed interest rate and equal payments each month. A closed-end home equity loan could be a great source of funds for a number of reasons: no change in an existing first mortgage, the possibility of tax deductible interest (consult your tax advisor), low interest rates, no mortgage insurance required, and you can use the loan for any purpose.
Option 2 - A Home Equity Line of Credit
A HELOC (Home Equity Line Of Credit) works more like a credit card. You are allowed to borrow up to a certain amount over the life of the loan. During that time, you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. This gives you more flexibility than a fixed-rate home equity loan.
Credit lines have a variable interest rate that fluctuates over the life of the loan. Payments will vary depending on the interest rate and how much credit you have used. When the life span of a line of credit has expired everything must be paid off. A lender may or may not allow a renewal.
Lines of credit are accessed by specially issued checks or a credit card. Lenders often require you to take an initial advance when you set up the loan, withdraw a minimum amount each time you dip into it, and keep a minimum amount outstanding.
As far as consumer loans go, Home Equity Lines of Credit have some of the lowest interest rates and minimum payments. Application and documentation requirements are generally less demanding than traditional first or second mortgages. This makes it easier to qualify. Mortgage insurance is not required on any Home Equity Lines of Credit, thus reducing monthly payments. Interest payments may be tax deductible (consult your tax advisor). Home Equity Lines of Credit may reduce your monthly debt payment if the borrower uses them to pay off existing debts.
The above are intended only as suggestions. If you are seriously considering a home improvement or complete remodel, talk to a CATT member, your local Banker and your tax advisor before making any financial commitment.
Contact a Professional member for more information.
Insurance Discounts
Many homeowners may not be aware that there are Insurance Discounts available for many kinds of improvements. Anytime the house receives upgrades to the heating, plumbing, electrical systems or the roof, you should contact your local insurance agent to ask about available discounts. A small amount of documentation might be needed in order to receive the discount, but after spending quite a bit of time and money on a remodeling project, it's nice to know that there could be some additional reward. There has never been a better time to remodel than now - so once your remodel is complete, contact your local insurance agent and ask about the renovation discount!