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Dollars & Sense- Tips on Borrowing Funds for Home Projects

dollars4If you’re like many Americans, buying your “dream house” is out of the question right now. But just because you can’t purchase a new home doesn’t mean you have to go without that extra bedroom, bathroom or custom kitchen. You just have to find the right people to help you out: lenders.
Tammie Aldridge, Assistant Vice President and mortgage banker with First Citizens Bank, admits that it can be pretty intimidating to walk into a bank to borrow money for a home project. That doesn’t mean it should be.
“When you are looking to borrow money it’s tough to sit down and talk about your money situation,” says Aldridge. Rest assured that banks are eager to help owners make home improvements. 
“The market is going to turn around eventually, and what we all have to realize is that our homes are our biggest investment,” says Aldridge. When you paint your home, upgrade the kitchen or update the bathroom, the value of your home increases substantially. 
If you have the cash to take on a renovation, get going. If not, “big box” stores may be eager to provide you with credit, and banks have a number of different methods to get you the funds you need. 
Always start at the beginning. What specifically do you want to do? Size matters. A small project, like putting in a new sink and toilet, will require one kind of funding, while a $250,000 addition will require a significantly different kind.   
dollars2For a small project, “It may not be worthwhile to go through the whole loan process,” says Debbie Goacher, Vice President/Residential and Construction Loan Officer with HomeTown Bank in Roanoke. With muscle and know-how you can do some small projects—think painting the home and updating the windows—that make your home more valuable and don’t require a loan.
If you are turning your dungeon-like basement into an apartment, however, it’s time to get a quote from a licensed and insured contractor and find a financial backer. 
A store credit card is a good option if you need less than $5,000 and you can pay it off during a credit card’s introductory rate period. But read that fine print. 
If you need more money or just a more creative kind of funding stream, it’s time to prepare for the bank visit. Before you go to the bank, you should know your credit history, your home’s value, your household income and liquid assets, your debts and how much the entire project will cost. It’s also helpful to brush up on your “banking lingo” so you can be well-versed when discussing different options. 
The most common loans offered by banks are Home Equity Loans, Home Equity Lines of Credit, and Construction Loans. Home Equity Loans, or HELOs, are good for one-time projects, and Home Equity Lines of Credit, or HELOCs, are good for ongoing projects. Both use the equity in your home as collateral. When you don’t have enough savings, liquid assets or equity in your home to use as collateral, a construction loan can be another avenue to pursue. They are most commonly offered by community banks and provide a certain amount of money to the contractor each time a project is completed.  
All lenders recommend that homeowners consider the rates of various banks to make sure they get the best possible rate. The experts also stress the importance of going back to a bank that has served you well in the past. 
“The important thing is to shop and to look at all of your options,” says Goacher. “All of those services come with different payments and different structures. You really need to look at all of the options to see what is going to work best for you.”
dollars1Bank Lingo 

HOME EQUITY LOAN (HELO): A loan secured by a deed of trust that allows homeowners to borrow against the equity in their homes. Typically, all funds are advanced in a lump sum with a set monthly payment, fixed rate and term. 
HOME EQUITY LINE OF CREDIT (HELOC): A line of credit secured by a deed of trust. Unlike a HELO, funds from a HELOC can be accessed multiple times, up to the credit limit, similar to a credit card. The biggest advantage of a HELOC is that you only pay interest on the amount you access.
LOAN-TO-VALUE: This figure is typically expressed as a percentage—the total amount of the loan(s) divided by the appraised value of the collateral. For example, if a borrower has a first mortgage of $150,000, and a home equity loan of $20,000, and the house has an appraised value of $200,000, then the loan-to-value would be 85 percent. ($150,000 + $20,000)/$200,000.    
FIXED RATE: The interest rate does not change during the entire term of the loan.
VARIABLE RATE: The interest rate may increase or decrease during the term of the loan in accordance to the loan agreement.
TERM: The period of time of a loan, typically expressed in months.
Advantages of HELOs and HELOCs: Typically, these types of loans offer a lower interest rate than other loan options. You can use the money for home improvements, education, debt consolidation, unexpected expenses, or anything else you desire. In addition, sometimes you can deduct the interest from your taxes; consult your tax advisor to discuss this potential benefit.
(Source: Jamie Asciolla, Vice President/Marketing, Freedom First Credit Union)

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