By Jonathan Yates
For many property owners, their house, condo, or townhome is often their largest asset and it behooves almost all owners to maximize the value of their residence. Much of what is feasible—structural additions, aesthetic upgrades, and often both—depends on the overall objective of the work. Is it to increase the value of the property as an investment or is it to enhance its enjoyment as a home for the owner? No matter the ultimate goal, there are many ways to finance the project(s).
It is often asked what home improvement is at the top of the list for return on investment. Topping that list is upgrading and/or adding bathrooms. There are many nice communities in our region and certainly many homes on the water that date back decades. As an example, Crofton, in Anne Arundel County just cele ated its 50th anniversary. While the houses and the community are desirable, the bathrooms, if not updated, are not. The same is also true for many of these homes’ kitchens. The good news is that repairs and upgrades to them do not have to be major overhauls: minor bathroom revisions return more than invested according to Frontdoor.com, a home repair website. Kitchen and landscaping are the next highest rated “biggest bang for the buck” property improvements. These make sense, as bathrooms and kitchens are used the most, with landscaping presenting the home to the public for that all important “first impression” we know as curb appeal.
A house on the water has additional considerations with many waterfront property owners facing an age old question: Are we a sailboat or powerboat home? The answer to which weighs in heavily for the dock and related boating facilities. Of course, maximizing the waterfront view of one's property is also smart in the “Land of Pleasant Living.”
Financing these home improvements wisely can make the investment generate even greater returns, whether financial or in quality of life.
The most used example of financing is through a home equity loan, or home equity line of credit. In this type of financing—which is borrowing against the value of your house—the interest rate is almost always lower than other loan vehicles. Because the borrower is less likely to default on a mortgage on their primary residence—which would mean losing their home—lenders can guarantee lower rates.
There are many options for tapping into the equity a property owner has built up in their home.
A loan can be taken out to finance a specific project, such as an addition. Depending on the terms, this could involve the lending institution releasing funds as certain milestones are met, such as obtaining necessary permits, having a foundation poured, etc. If more flexibility is desired, a home equity line of credit can be established. Here the homeowner can write checks against a set amount over a period of time. It is much like a pre-paid debit card with checks in this regard.
If a homeowner does not want to mortgage their house to underwrite repairs or upgrades, there are other financing options. For those with strong cash flows and excellent credit, there are cash access checks from credit card companies that can come with a zero interest rate for a set period of time. But take caution, when the zero rate expires, the interest rate can explode well into the double digits. Here a homeowner wants to pay off the credit balance during the zero interest grace period. After that, it becomes very, very expensive. The benefits of this type of financing are zero interest rates for a set period, the loan is not secured by an asset such as the home, and the more often a borrower does this responsibly, the more the often the credit card company will offer this option.
The higher the credit scores of the borrower, the better the options for refinancing for the homeowner. Between borrowing against your home and racing against the clock after cashing a check from a credit line, there are a variety of conventional loans and other forms of financing. These range from a basic signature loan based on the perceived ability of the borrower to repay, to “hard money loans” that are very expensive but very convenient. Most lenders will want the security of having the house being put up as collateral. This raises the overarching questions of: What is the purpose of the property in your possession? And what is the goal of the improvement project?
Are both investments, with an intention of immediate return on the dollar? If so, the best financing could be cash access checks or hard money funding that allow for the project to be completed and the property put up for sale in the most expeditious manner possible.
But if the renovation is to make the home more comfortable for the future enjoyment of the borrowers, then a long-term home equity loan would be better, as the overall terms should be less onerous. With home improvement projects, the final objective is what dictates the most suitable form of financing for the owner.
