Know Your Financing Options Before Getting Started

Learn How To Pay For Your Project

The number #1 decision you'll face is how to pay for your project. There are a wide variety of choices available. Depending on how you finance the project you may even be able to deduct the interest from your income taxes. Be sure to seek competent tax counsel because it's not always easy to know what's deductible. Your decision may depend on the size of your project and whether you need to do it right away - but more likely, it will depend on how much cash you have available or how much equity you have in your home to help you finance the job.

Make a budget.  

You have done all of your homework and have adjusted the proposed products and features of your project to get the most out of each item. It is a juggling act and you will find yourself wanting to spend more on items or materials that are important to you and less on others or areas that can be less obvious. Gather all of your estimates for the project (that you will be purchasing), design fees, contracts, and loan paperwork together. Adding up their costs will give you the projected cost for your new home improvement. You should then include an additional 15-20% of that total figure to cover cost overruns or changes--just in case. This should give you a final budget figure to take to your loan officer.

No matter what your budget is, you want to keep it under control. It is very easy for that money to burn a hole in your pocket before it is time to make the last contracted payment--which may be several months down the road. Resist the temptation and keep this money earmarked for this project as contracted. Your contract will state when and how much is due at different construction intervals--the best contractor is a paid contractor!

 Just when you think you have everything covered in your budget, think again. You believe that your home has proper electrical and plumbing systems, but until demolition begins you can't be sure (unless you put them in). When finalizing your budget, you should have planned for cost overruns (unexpected conditions while the construction is being completed). Plan for it because it may happen and it is better to be prepared.

On average, allow at least 15-20% of your total budget for cost overruns. If you come in under budget then everyone will be happy!

Watch Out For Change Orders

 "Change Orders" are created when you or your contractor change your mind after the contract is signed. Depending upon the scope and timing of the change, it can create a major mess that will (most likely) have a huge impact on your project's bottom line and timeline--especially if the change is at your request. The more changes--the higher the cost overrun. 

Whether it is the homeowner or contractor who changes something according to the contract, a "Change Order" must be agreed upon between the parties and said "Change Order" must be drawn up for whatever changes are necessary. This is intended to keep both parties in the communication loop and avoid misunderstandings.

Get the money. Consider all of your financing options and choose the one that's best for you: Consider cash-out refinancing - Refinance your existing mortgage and take all or part of your current equity in cash. Most appropriate for long-term projects requiring a lump sum amount. Consider this option if you plan to stay in your home long enough to make refinancing cost-effective (interest rates are usually lower than those on second mortgages).  The simplest method is to just borrow the money using an 'unsecured loan'. This type of loan is best when you're dealing with a smaller project (under $10,000). You won't have the loan costs associated with other types of loans. The downside is that the interest rate will be higher.

If you have a 401(k) or 403(b) retirement plan, you may be able to borrow against it. You'll avoid most closing costs. This works best for smaller projects since you'll be limited to a fairly short time frame to pay back the loan.

Another method is to get a 'home equity line of credit'. Tapping into the equity of your home is a low-cost credit vehicle well adapted to financing home improvements. Normally, equity just sits there growing until you sell your house. Home equity loans and home equity lines of credit, HELOCs, let you use this asset without selling your home. In addition, interest payments on a home equity loan are, within limits, deductible on federal income tax. The amount available in home equity lending depends on the percentage of equity that your lender is willing to fund. Some lenders, under some circumstances, may let you borrow based on the increased amount of equity you'll have after the improvements. 

A 'second mortgage' is another option. It's similar to the home equity loan in that you're borrowing the equity in your home. But a second mortgage is usually for a fixed period of time and often carries a fixed rate of interest. Once again you'll face closing costs. You may even need to buy title insurance and pay processing fees.

Check the newspaper for rates. Look in the real estate section or business section of the Sunday newspaper for information on current interest rates. It will show rates for new home purchases as well as for equity loans you can use to fund a remodeling project. Call several lenders for rates and terms based on the type of mortgage you want.

Calculate your payments. Any bank or savings and loan can help you determine monthly payments based upon a specific loan amount, term and interest rate. Also you can quickly find handy loan calculators on the Internet.

For any type of loan, you will most likely need the following paperwork:

• the social security number for each borrower

• your most recent pay stub (if self-employed you'll need your business's P&L and balance sheet--signed by an accountant, and the last two year's personal and business tax returns)

• All bank account and creditor information, numbers, addresses, and balance approximations.

• If applicable, any documents regarding judgments against you ( i.e. bankruptcies or creditor lawsuits)

Pay with cash. Use your savings to pay for project. Appropriate for long- or short-term projects. However, consider financing large projects versus paying cash. It may be more profitable to invest your cash, and refinance or take out a second mortgage. If you do pay cash, always pay in agreed-upon increments.

One final option is to borrow the money from your contractor.  This is called in-house financing. In-house financing is an option that is offered by many companies. This can be done as a short-term loan or as permanent financing. Many companies will either help you obtain financing for the project or they will carry the note. Many companies offer a variety of financing plans in order to assist the customer in getting the best out of their money and time. It is much more convenient to finance with the company that is doing the work. By doing all of your business from financing to project completion in one setting, it saves the hassle of going from construction plans to bank or other financial institutions to secure a loan for the improvements.

Whether you are building or remodeling, keep all of your documents, contracts, and receipts, together--this will also help when visiting with your insurance agent and at tax time. If you are working with a loan officer, give them copies of what they need and keep your originals. 

Don't let payments get ahead of the work. A home improvement contract must include a schedule of payments showing the amount of each payment in dollars and cents-not percentages.  It should be directly related to the work or services to be performed and to any materials and equipment to be supplied. In other words,do not pay for something you have not received yet or has not been completed. Where's the incentive to do the work if you've already paid ahead of time? This is where people will typically experience a "no show" contractor-your house sits for several days or weeks with nothing going on. You'll find yourself trying to track the guy down and when you do, you'll get some lame excuse, usually blaming others for holding him up and still no work to show for what you've paid for. A typical scenario that can be avoided by only paying for work that has been done.

Don't make a final payment until you are 100% satisfied with the work.

Make sure all work outlined in the contract has been completed and any corrective work or repairs as a result of contractor error or carelessness has been taken care of and all subcontractors have been paid. Call the subs to verify and be sure to get lien releases from the contractor as well as any one who has served you a preliminary notice at the beginning of your project.

Warranties! Most reputable contractors will guarantee their work for one year (on average). The warranty period and included services should be specified in your contract. Appliance and cabinet showrooms may have warranties on items purchased and/or installed by their staff. Extended warranties may also be purchased on some items. Manufacturer warranties will vary considerably. Some manufacturers start their warranty on the day an item is purchased, some on the day it is delivered, and some on the day it is installed. Work with your Designer and General Contractor (and whoever else may be involved in specifying and ordering your products and appliances) to review all warranty periods and details.

Home improvement projects can be both a source of joy and frustration. Navigating through the potential financial pitfalls will help avoid some of the most likely aggravations. After all, your home should be your castle. And a newly remodeled castle should definitely be something to be enjoyed!

If all this makes sense, and you're curious how I can help get your project rolling both on a financial and contract basis, please give me call us today. This is simply a chance for you to meet with our company and staff, and see if our services can benefit you and your project. 

If you are looking for a Oregon replacement window installation contractor, please call us today at (503) 640-1700 or complete our online request form.