If you are a homeowner considering investing in a sunroom addition or any other home improvement project and you have not saved up enough cash to pay outright, this message is for YOU.
Sunroom additions, like nearly any home improvement project, tend to require a healthy budget and of course we all know you can save a good chunk of money by avoiding borrowing altogether. However, many that are considering this type of a project today – whether or not their income has been directly affected by the Fed’s policies regarding our money supply – are not entirely sure where the balance of payment for such a project will come from. In response to this common uncertainty, many financing options exist that you should know about.
The source of financing that suits you best will depend on many factors, including how much your project will cost vs. how much cash you have on hand, the length of terms you are seeking, whether you will be doing other home improvement projects in the future, how much equity you have in your home and other questions of risk and collateral. If you remain convinced that the personal return you will get in your quality of life by transforming your environment one step closer to your dream home will outweigh the purchase costs, below I will review some general and more specific DOs and DON’Ts that you ought to consider in rounding out your payment.
Of course in the land of lending there are no guarantees. We at Brady-Built Sunrooms cannot promise that you will necessarily have success or good handling by any of these third parties. However, it is important that you are aware that home improvement projects can come to life under a wider variety of circumstances than you might have thought. We wish you all the best in the pursuit of your remodeling dreams.
First of all, if it is even being offered, we would generally warn against getting financing from your contractor. Some contractors even unwittingly negotiate shady deals from sub-prime lenders that are loaded with hidden costs and fees. It is usually in your best interest to negotiate the project price with your contractor and then get financing on your own.
Then, unless you have nearly enough cash on hand to complete your project we would certainly not recommend paying with a credit card, since anything more than a few thousand dollars is rarely worth the high interest rates those companies charge. Although you will not pay any loan fees or closing costs on credit card transactions, you should use this option only if you can pay off the balance in under a year.
We have recently discovered that whether for kitchen or bathroom remodeling, or asunroom or a swimming pool, HFS Financial has been helping clients in all 50 states get unsecured remodeling loans. At their website, YourProjectLoan.com, you can fill out their 60 Second Loan Application and one of their team members will contact you with information within 24 hours. One big advantage here is that your credit will NOT be pulled so there is no impact on your credit score regardless of the decision.
Next up is a home equity loan from a credit union or elsewhere, that uses your house as collateral, just like a primary mortgage. With a home equity loan, you borrow once against the equity you have already paid into your home, in other words, its current value less the amount of the existing mortgage. This can be an especially good option for financing a one-time project, since the borrowed amount is fixed. The interest rate is also fixed, which can be an advantage since today’s low interest rates are fairly likely to rise over the life of such a loan. One major plus with home equity loans used for home improvements is that the interest you pay back to the lender is typically tax deductible under both state and federal guidelines up to $1,000,000. The down side is that, in most cases, you will have to pay a closing cost. And, as with any loan secured by your home, you risk foreclosure if you cannot make the payments on top of your regular mortgage. A few local Massachusetts options currently advertising their home improvement lending programs are IC Federal Credit Union with branches in Fitchburg, Leominster, Ayer, Westminster; Spencer Savings Bank with branches in Spencer, Leicester, Rutland, Warren, Worcester; Metro Credit Union offering services to all Essex, Middlesex, Suffolk, Norfolk, Plymouth, Barnstable or Worcester county residents, and Salem Five.
Alternatively, you may decide to refinance your original mortgage for a larger amount while interest rates are low and home prices are rising. You will simply get the difference back in cash and, as with a home equity loan, you will pay closing costs and fees.
If you are ambitiously planning to stack a sunroom alongside other home improvement projects instead, you might consider a home equity line of credit (HELOC), which, like a home equity loan, uses your home as collateral to guarantee payment. The idea is that a HELOC allows you to vary the amount of your withdrawal over time up to a maximum point based upon the available equity in your home. The other big difference is that the interest rate for a HELOC is usually variable, which means it can rise and fall along with the prime rate set by the Fed. Like home equity loans though, the interest you pay on a HELOC is also tax-deductible.
If you do not have a lot of equity in the home, you can still apply to certain banks for Title 1 loans which use your home as collateral and pay interest and closing costs just like home equity loans and HELOCs, but the risk is insured by the federal government. They are meant to help finance light-to-moderate rehab projects on either private homes or nonresidential buildings and the maximum loan amount for a single family home is $25,000.
Regardless of whether you have reached the 59½ threshold for tax exempt withdrawals, most employer 401(k) plans allow you to borrow money to pay for home improvements. It is usually worth checking since the rates are usually low, the term is generally five years and you don’t have to pay fees or qualify for a loan. The biggest risk here is if you change jobs while carrying a remainder, you will have to pay back as much as possible in only 60 days or get hit with penalties and taxes on the balance.
For those not necessarily planning an immediate home improvement project but who have a good amount of free cash flow and who are looking for long term liquidity, there is also a concept know as Bank On Yourself. This is a super-interesting twist on a few technical aspects of a whole life insurance policy that takes all the standard death and equity benefits and adds the ability to borrow tax-free once your equity builds up without ever losing the interest growing in the cash value of the policy, as you would in borrowing from the 401(k).
Lower on the scale, Massachusetts has a Home Modification Loan Program that provides low- and moderate income residents no-interest loans to elders, adults and children with disabilities. Such home modifications allow individuals with disabilities to remain in their homes and continue to live independently in their communities. Any homeowner who has a disability or has a household member who has a disability, or rents to an individual with a disability may apply for this loan. Contact Susan Gillam at (617)-204-3739 or Susan.Gillam@MRC.state.ma.us if you believe a sunroom can help improve the life and health of a disabled family member.
Another low- and moderate-income option for residents of Massachusetts lies with Mass Housing, the state’s most affordable housing bank. They lend money at rates below the conventional market to support affordable rental and home ownership opportunities. Their Home Improvement Loan Program provides funds to make general, “non-luxury” improvements to your property, which include necessary home modifications.
Low income rural homeowners may receive Rural Development funds from the USDA at a 1% interest rate to make substantial home repairs, or to remove health and safety hazards. The Home Repair Program also provides funds to improve accessibility for someone with disabilities. Homeowners 62 and older are eligible for grants and low income families and individuals may also apply. USDA regional offices: Western MA 413-585-1000, Central MA and the North Shore 508-829-4477, Southeastern MA, Cape and Islands 508-295-5151.
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