Paying for Home Renovations

BY PAMELA BABCOCK

The pandemic brought a surge in home improvement projects that doesn’t appear to be waning. While the U.S. economy shrank by 3.5% in 2020, spending on home improvements and repairs grew more than 3%, to nearly $420 billion, as people modified living spaces for work, school, and leisure, according to “Improving America’s Housing 2021,” a report from the Joint Center for Housing Studies of Harvard University.

According to the report, “the pandemic has in fact been something of a boon for the remodeling industry by forcing a variety of housing and lifestyle changes that encourage improvement spending.

The outlook for remodeling remains positive, particularly given the uptick in residential mobility. Many living in expensive metro areas are moving to lower their housing costs, which leaves more of their budgets available for remodeling projects. In addition, those who deferred projects at the height of the pandemic are moving forward with repairs and improvements. Replacement projects –upgrades to roofing, siding, windows, systems, and equipment–were the most popular in 2019, accounting for 46% of total expenditures, while spending on discretionary projects such as kitchen and bath remodels and room additions made up 29%, according to the report.

Some use cash to pay, while others turn to lines of credit, conventional or government loans or credit cards. If all this sounds daunting, don’t worry. According to LightStream’s annual Home Improvement Survey, 62% of respondents said they get excited about home improvement projects but 61% said costs deter them from moving forward. The survey also found that while 43% of homeowners have some knowledge about financing options, 11% said they have “no knowledge” but want to know more.

Finance Options for Your Clients Next Remodeling Project

Saving and paying cash:

If you can, saving cash is your best option, according to Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Kiely knows paying cash isn’t an option for many, especially the younger generation that may be footing college bills and sapped from years of paying high apartment rents.

As a tax preparer, I see personally the finances for a lot of people. There are clients who have $75,000 in interest income and then I have clients that have $200 in interest income. Some people are naturally savers,” said Kiely.

Home equity line of credit (HELOC):

A HELOC isn’t a loan but a variable-rate, revolving line of credit (usually up to 80% of your home’s value, minus the amount you owe on the mortgage) that allows you to borrow against the equity in your home. HELOCs come with a draw period and repayment period.

For example, if your home is worth $500,000 and the outstanding mortgage is $200,000, a bank may give you a line of credit for 80 percent of $300,000 (the equity you have in the house) or $240,000. Steve Cimiluca got a HELOC to replace the roof, upgrade HVAC, and do a six-month gut overhaul of the first floor of his family’s home in Hasbrouck Heights in 2020.

It was kind of no brainer because the interest will be tax deductible,” said Cimiluca.

Best of all, if you have a line of credit and don’t need to spend all of it if you don’t need to and therefore won’t have additional debt and pay related interest on the extra amount, as you would with a conventional loan.

Home equity loan:

Unlike a line of credit, this type of loan provides a lump sum for improvements. It’s also based on the equity in your home. You’ll have fixed payments and a fixed interest rate for the life of the loan.

Personal or conventional loan:

Unlike a HELOC or a home equity loan, you don’t have to put your home up as collateral. But interest rates are typically higher and there’s a shorter timeframe to repay the money – typically five to seven years. You may get a low-interest rate but can’t deduct interest paid for home improvements, as you can with a HELOC or a home equity loan.

Credit card:

Some cards provide cash back rewards for every dollar you spend but you’ll want to pay off your balance pronto since credit cards typically have much higher interest rates than other financing. Renovation costs also often exceed your credit limit and you don’t want to max out your credit card.

Cash-out refinance:

A mortgage refinance could lower your rate and monthly payment and free up cash for renovations. A cash-out refinance replaces your current mortgage with a bigger one, which includes your current balance, equity you’re taking out and closing costs you want to include, according to Bankrate. You can deduct interest you pay on the new mortgage if you use cashed-out funds to make certain capital improvements. Be sure to check with a tax professional to ensure the projects you want to undertake qualify.

Other financing options:

Government-backed loan options include Fannie Mae HomeStyle Renovation and Freddie Mac Choice Renovation. According to Bankrate, they typically offer “more favorable terms and interest rates” than personal loans, credit cards or home equity loans. Unlike HELOCs or home equity loans, which are based on equity you have in the home before you do improvement projects, the HomeStyle loan limit is based on a percentage of the value of your home after improvements are made.

Looking back on his project, Cimiluca said paying cash was never a consideration since he prefers to keep his money in investment accounts. His advice to anyone trying to figure out how to pay is to do online research and speak with a banker or financial advisor.

We didn’t start work until we got the money – that’s pretty important,” said Cimiluca. “If you already have accounts with a certain bank, the bankers will be very helpful and tell you what your options are.

Ask if they offer any special promotional rates for the first year. Cimiluca said he obtained one that’s “very close to prime.” The rate is adjustable each year based on a margin and lower than it would have been on a conventional mortgage.

He estimates the renovation has increased the home’s value by up to 20% and that his family will save $3,000 to $5,000 on taxes this year by deducting the interest.