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Modesto, CA Budget and Financial Planning for Home Improvement

Modesto, CA Home Improvement Guide



Develop a Budget
Banks; Home Improvement Loans; Real Estate Loans; Financing

Before beginning any home improvement project, determine the amount of funding available that won’t place a strain on current resources. It is imperative that budgeting be based on what you can afford and not the cost of a dream renovation. If your dream kitchen is beyond your current reach, hold off on beginning until the full amount can be acquired. Remodeling projects should never require a second mortgage.

Starting a remodeling project can be exciting and you’ll be anxious to get started right away. Hold off before rushing down to the local home improvement store to start purchasing new accessories. Take some time to sit down and evaluate the available budget and possible lending options. It will be easy to overspend as you shop for materials, fixtures, appliances, cabinets, etc., without consulting the budget. Avoid the headaches and regret of realizing the budget is overspent after the project has been completed.

Determine a Budget
The budget for any remodeling project is based on a variety of factors and should be set by the homeowner. Finalize the budget prior to calling a contractor and don’t rely on them to set it for you. The final budget should be determined based on the amount of disposable cash, current equity in the home, and the value of comparable homes in the area.

Reduce the size of the loan up front by using money from a savings account or available cash. Most home improvement projects are planned months or years in advance. Saving up for the remodel decreases the required amount of the loan and cuts down the amount of interest.

If a loan is required, leverage the current equity established in your home prior to considering a second mortgage or personal loan. This will benefit the home owner in avoiding a higher interest rate and in some cases, preventing the need for a monthly home improvement payment. Work with your lender to choose the option that is best for you. Refer to the section below entitled Traditional Financing for an explanation of the standard home improvement lending options.

Protect your investment by evaluating the planned renovation against the value of homes in the area. Consider how the remodeling project will affect the value of the home once it is completed. With the increased equity, how will the value compare against other homes in the neighborhood? Make sure the full value is gained by staying within home prices in the area. If the home’s value is significantly above the price of other homes in the area, you may have difficulty recouping that cost when you sell. Also consider the length of time you plan to stay in the home. If you plan to live in the home for five or more years, determine the annual growth rate in the area and evaluate if the increased value can be gained over time.

Provide a Contingency Plan
Once the final budget number is determined, reduce the amount by 10-25%. This reduction now becomes the final budget for the remodel. The amount removed, becomes the contingency plan. A contingency plan is set aside to cover unforeseen problems or change orders that occur during the project. Providing this cushion is crucial as there are hidden problems that occur with any project. Even when using a contractor, a contingency budget is required because it is impossible for them to know what hidden problems are behind walls or under floors prior to removing them.

The percentage removed should be based on the complexity and size of the project. A standard roof replacement is typically a fairly straight forward project. Therefore, an 8-10% contingency should be sufficient. For a kitchen remodel however, demolition of an existing kitchen is required along with electrical, plumbing, appliance installation, material replacement, etc. To ensure enough contingency is allotted, the percentage should increase to 22-25%. Don’t think you have to use every dollar of the budget. If the number of unexpected problems is minimal, budget will be left over. This could be used for other needs or placed back into savings.

Determine Your Needs
Create a list of what you would like to include in the remodel. This should include all upgrades, types of materials used, design wishes, etc. Consult with designers, home improvement stores, magazines, or online sites to learn the latest trends and get ideas of what to include. Prioritize the list and break it down to a column of must-have and wish-to-have projects. Depending on where the estimate comes in, adjustments may need to be made. Already establishing which projects are not critical makes the process easier.

Get an Inspection
Prior to starting any work, have the home inspected to make sure there are no structural or mechanical defects. Finding structural surprises after the project is started can exhaust the budget before it can be completed. Hiring a home inspector prior to beginning can save you time and eliminate stress. Structural issues always take priority and discovering them up front allows you to make better decisions on how they should be handled, prior to jumping knee deep into the remodeling project.

Secure Estimates
Once a budget is secured and the inspector gives the green light, obtain a variety of bids from home improvement vendors. Request bids from a minimum of two to three companies. This provides a realistic cost expectation based on the materials, time and labor involved in the project. Obtaining a minimum of three quotes also identifies any companies that are aggressive in their pricing and provides an apples to apples comparison of what each company charges. Be specific in what you are looking for in the completed project to make sure each bid is pricing out the same materials and job requirements.

Track Spending
Home improvement spending can easily get out of control. Making a decision to upgrade material or include a decorative element may seem minimal at the time, but based on the total square footage of the room, costs quickly add up. In order to stay within budget, create a budget renovation worksheet. It should include every element of the project and be updated frequently. Adjust the worksheet to include every invoice, change order, upgrade, downgrade, etc., to ensure it includes the most up-to-date cost of the project. This allows you to know where the budget stands all times and avoid financial difficulty once the project is completed and it is significantly over budget.

This guide offers a Home Improvement Renovation Worksheet to help you track each project element and stay within the total budget.

Download a copy of the worksheet and start budgeting for your project.


Financing
Banks; Home Improvement Loans; Real Estate Loans; Financing

Securing the optimal financing for your home improvement project requires some research. The difference of even one percentage point in lending options could mean thousands of dollars, depending on the length of the loan. Many lending companies offer home improvement loan options, but use caution before signing. The promise of zero percent financing for the first year quickly jumps to 10-18% in subsequent years for any remaining balance. Be sure to review the fine print and know the details of the loan before locking it in.

There are several options available for securing a home improvement loan. Review each one specifically to find the one that is right for you. If a large amount is required, tapping into existing equity in your home is more advantageous. Depending on your financial situation, taking out a second mortgage can be difficult long term. Second mortgages require a separate loan payment, in addition to the current mortgage payment. Evaluate the various options and speak with your lender to find the program that best suits your financial needs.

Credit Card
For projects costing a few hundred or few thousand dollars, depending on current interest rates, a credit card may be the best option. Consider a credit card when you anticipate paying off the amount in three months or less. While the interest rate is a bit higher and the interest is not tax deductible, little to no paperwork is required to make a purchase. It also requires no existing equity in the home and interest charges are limited when paid off quickly.

Title 1 – FHA Loan
If the amount of equity in your home is limited, consider a Title 1 FHA loan. This is a loan offered by a bank or other lender and is insured by the Federal Housing Administration. The loan is offered at a lower interest rate and the length of the loan is extended up to 15 years. Almost anyone who owns their home can apply for a Title 1 loan and eligibility is often less strict than other loans. Home improvement projects are limited to essential projects and prohibit luxury projects such as swimming pools. The loan can be used to cover vital home repairs or make the home wheelchair accessible for those with a disability.

Home Equity Loan
A home equity loan is optimal when the funding covers a one-time, straight forward project. The possible amount of the loan is based on the existing equity in the home; length of payment ranges from 5-15 years depending on the amount. The loan amount and interest rate are fixed and secured at the time of the loan. Payment requirements are then set, establishing a fixed monthly payment for the length of the loan. This is often preferred for those who want to avoid varied interest rates often charged by other loans. Depending on the lender, closing costs may be required.

Home-Equity Line of Credit (HELOC)
A home equity line of credit works like a credit card offering an open line of credit and requiring payment for only the amount you use. This is optimal when several home improvement projects are planned or the length to complete projects will take longer than a year. The borrowed amount becomes like a second mortgage and the loan is typically open for up to 10 years. The interest rate is much lower than a credit card and is based on the current prime rate plus or minus a few percentage points. Therefore, it varies throughout the length of the loan.

The flexibility of the loan makes it easier to cover unexpected problems that can occur during the project. If hidden plumbing issues are uncovered once a wall is opened, a HELOC can absorb the additional costs without requiring reapplication for a loan increase. Lending fees are typically minimal and interest on the loan is tax deductible.

Cash-out Refinance
This financial option works best when housing prices are rising and interest rates are dropping. A new mortgage is refinanced on your home, allowing you to cash-out the existing equity to be used for home improvements. Unlike other loans, this loan does not require any second loan to be repaid. Home improvement projects are paid in cash and equity is once again rebuilt through mortgage payments.

Borrowing against Investments
If you want to avoid borrowing against your home equity, tapping into investment assets is another option. This allows you to leverage a portion of the money sitting in an investment to pay for the home improvement project. Depending on the amount required, this can be a viable option with possible downsides if the dollars are not paid back before using the asset.

    401(k) Loan: Some 401(k) plans allow you to borrow against it for home improvements. This can be a painless solution as the money you are borrowing is already yours. Therefore, the interest you pay on the loan goes back to you. Penalties will be assessed however, if you leave your job before the full amount is repaid. Early withdrawal penalties and taxes on the full amount borrowed will be applied. The IRS will also assess tax fees if the amount borrowed is not repaid in full, within 5 years. Keep in mind that this option stunts your retirement savings until it is fully paid back.

    Investment Portfolio: A margin loan can be taken out against your securities for up to 75 to 95% of their value. It is not recommended to use more than 50% of the value as you will be responsible for repaying the full amount, even if the market drops. Depending on the amount, you may need to sell the stock itself to make up the difference.

    Life Insurance: Cash can be obtained by borrowing against the value built up in your life insurance policy. Up to 95% of the cash value of the policy can be borrowed. However, the policy value is now decreased should you die before it can be repaid, leaving your family with a lesser payout.

There are advantages and disadvantages to any home loan option so make sure you take the time to research which one best fits your needs. Discuss all of the options with your bank or financial advisor. Improvements on your home can provide considerable equity and quality of life. Make sure you fully enjoy the benefits by selecting the right home loan for you.

 
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