Financing Remodeling with Home Equity Funds

By Allison Beatty

Homeowners across the country have seen record home appreciation during the past 10 years. This build up of values often translates to a large stash of equity that can be used for home remodeling and other expenses.

Here’s how homeowners can use home equity financing to achieve home remodeling goals.

The first step homeowners should take is to get a realistic idea of their home’s value. In many cases, this involves talking with a few real estate agents and, eventually, a property appraiser.

When applying for a home equity loan, the mortgage lender typically has an appraisal done to verify a home’s estimated value.

The second important step is for homeowners to start talking with contractors about their remodeling goals. Homeowners then can get a realistic picture of whether their dream kitchen will cost $20,000 or $75,000.

After getting cost estimates, homeowners should talk again with lenders to determine how much they can borrow and the specifics of the lending packages. Homeowners typically can borrow up to 85 percent of the equity in their homes, which leaves the lender a little cushion in case home values decline.

The loan schedule typically is for four years, with equal monthly payments.

The final step is to decide how much money to borrow, based on input from the lender and contractors. It is wise for homeowners to add a 10 to 15 percent contingency to the estimated project cost.

Homeowners who plan a $30,000 kitchen project, for example, should seek to borrow $33,000 to $34,500 through home equity financing. This should cover planned and unplanned costs.