Making Use Of Home Loans

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Most home improvement projects start in the spring and summer. Whether you've just settled into a new home or you've been in one for a while, whether you need more space, or that avocado kitchen is driving you nuts, you need to plan for change.

If you are thinking about adding an improvement or remodeling, there are some financial considerations. And if you prepare, the government could help pay, reports Financial adviser Ray Martin on The Saturday Early Show.

Most home improvement experts agree that the key to successful completion of a remodeling or improvement project is organization and planning.

Define exactly what it is that you want done, get quotes and preliminary bids and work up a budget, get a contractor and a contract. It's a good idea to factor in 20 percent or so for contingencies and extras.

If you plan on hiring a tradesman or contractor for your project, it's a good idea to get bids or estimates from at least three qualified professionals. When there is strong demand for home improvement services in your area, this will be difficult to do, but do not skip this step. Check references, ask to see similar completed jobs, request to see copies of general liability and workers compensation insurance certificates. Always ask for a written contract before you pay any money or begin work.

Contact a local lawyer for a list of specific contract issues or www.nolo.com for general information and resources. This step will save you a lot of potential headaches.

THE CONTRACTOR CONTRACT: What to Get in Writing The contract should include these elements:

  • Contractor's name, address, phone number and license number
  • Complete description of the work
  • List of materials
  • Complete costs and schedule of payments
  • Description of heavy equipment use and access
  • Start date and completion date
  • Process for changes during the project
  • Written warranties for all work and materials
  • Arbitration clause for dispute resolutions
  • Lien release clauses to protect you if your contractor does not pay workers or suppliers.
Consider if it's worth it to remodel. You also want to make sure you think about how long you are planning to stay in the house.

Think "resale value" before you begin a project, especially if there is a possibility that you could sell the home in several years due to job relocation, retirement, a family addition, etc. For example:

1) Minor Kitchen Remodel
Job Cost - $10,800
Resale Value - $10,300
Cost Recouped – 95 percent

2) Deck Addition
Job Cost - $7,300
Resale Value -$3,800
Cost Recouped – 52 percent

Ask yourself: Is the renovation worth it, if you are planning to sell the house any time soon? You would be giving the next home owner a gift. You can contact a local realtor to get survey of local costs for various remodeling projects.

Once you decide that you want to go ahead with the remodeling, you must figur out how to pay for it.

There are several options to consider when financing your project.

  • USE AN EQUITY LINE-OF-CREDIT. This is a loan based on the value of the home in excess of the current mortgage amount. You can often get these approved in a week or two and the best deals often come from a local bank where you have a checking account. Interest rates are usually tied to a percentage above the five-year Treasury note, there are usually no closing costs and you can draw on the line as needed to pay for the project. Generally, home equity interest paid is tax deductible as an itemized deduction for loan amounts up to $100,000.
  • REFINANCE YOUR MORTGAGE. Consider refinancing your equity line and current mortgage into a new mortgage after the project is complete. Using the home's higher appraised value will allow for this. Compare combined interest costs of the existing loans to the interest cost and refinancing fees for the new mortgage.
  • GOVERNMENT FINANCING: HUD Title 1 Home Improvement Loans. The U.S. Department of Housing and Urban Development works through a network of approved lenders to offer two loans for home renovations.
  • The Title I Property Improvement Loan Program: If the equity in your home is limited, the answer may be a Title 1 loan. Banks and other qualified lenders make these loans from their own funds, and insure the lender against a possible loss. This loan insurance program is authorized by Title I of the National Housing Act. Title I loans provide short-term fixed-rate loans of up to $25,000 for specific home improvements.

    They are available to any person 18 years or older for eligible improvements to their property regardless of the amount of equity available in their property.

    The Title I Program is used for products or improvements that become a permanent part of the property. Insured Title I loans may be used for any improvements that will make your home basically more livable and useful.

    You can use them even for dishwashers, refrigerators, freezers, and ovens that are built into the house and not free-standing. You cannot use them for certain luxury-type items such as swimming pools or outdoor fireplaces, or to pay for work already done.

    Title I loans can also be used to make improvements for accessibility to a disabled person such as remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, installing wider doors and exterior ramps, etc. Another use is energy conserving improvements or solar energy systems.

    Improvements can be handled on a do-it-yourself basis or through a contractor or dealer. Your loan can be used to pay for the contractor's materials and labor. If you do the work yourself, only the cost of materials may be financed.

    To find an approved lender in your area, call HUD's Customer Service Center at 1-800-767-7468 (TTY: 1-800- 877-8339) or go to www.hud.gov

  • USDA Repair and Rehabilitation loans and grants. Loans and Grants are available through the United States Department of Agriculture Rural Development Rural Housing Service Rural Housing Repair and Rehabilitation

    The Rural Housing Service (RHS) is an agency of the U.S. Department of Agriculture (USDA). Located within the Department's Rural Development mission area, RHS operates a broad range of programs. Loans are loans funded directly by the Government. These loans are available to very low-income rural residents who own and occupy a dwelling in need of repairs. Funds are available for repairs to improve or modernize a home, or to remove health and safety hazards. This loan is a 1 percent loan that may be repaid over a 20-year period.

    Purpose: The Very Low-Income Housing Repair program provides loans and grants to very low-income homeowners to repair, improve, or modernize their dwellings or to remove health and safety hazards.

    Eligibility: To obtain a loan, homeowner-occupants must be unable to obtain affordable credit elsewhere and must have very low incomes, defined as below 50 percent of the area median income. They must need to make repairs and improvements to make the dwelling more safe and sanitary or to remove health and safety hazards. Grants are only available to homeowners who are 62 years old or older and cannot repay a Section 504 loan.

    Terms: Loans of up to $20,000 and grants of up to $7,500 are available. Loans are for up to 20 years at 1 percent interest. A real estate mortgage is required for loans of $2,500 or more. Full title services are required for loans of $7,500 or more. Grants may be recaptured if the property is sold in less than three years. Grant funds may be used only to pay for repairs and improvements resulting in the removal of health and safety hazards. A grant/loan combination is made if the applicant can repay part of the cost. Loans and grants can be combined for up to $27,500 in assistance.

    Approval: Rural Development should make a decision on a complete application within 30 to 60 days. For more information, go to www.rurdev.usda.gov/rhs.

Finally, after the project is complete, review your homeowner's insurance. Since your home has increased in value, your coverage should reflect this. Your coverage should be at least 80 percent of the new replacement cost.

This coverage amount ensures that partial losses are fully covered on a replacement cost basis. To be fully protected on a total loss, you must keep your home insured to 100 percent of the replacement cost. If you carry less than this minimum coverage, you'll receive payment for a percentage of the loss based on the percentage of the coverage bought versus the required limit. Remember to cover the value of additional contents and landscaping too.

Keep a record of the cost of all remodeling and improvements to your home. These costs increas the amount you can subtract when figuring your profit or gain on sale. With the new tax rules allowing married filers to exempt up to $500,000 of home sale gains (and $250,000 for singles), it's likely that many people may never again pay tax on gains from the sale of their home. But, hey, you never know.

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