With the market for existing home sales declining, homeowners are deciding not to sell their homes, but upgrade instead, according to Informa Research Services. A recent study conducted by Harvard University's Joint Center for Housing Studies estimates that Americans spent $155 billion on repairs and home improvements in 2006, a 2.8% increase from 2005. That number is projected to rise to $160 billion in 2007.
Should interest rates and home appreciation values hold steady, many homeowners will continue to invest their money in improvements to increase the resale value of their existing homes — it's cheaper to remodel your home than it is to move. However, should the tide turn in favor of higher interest rates and home values depreciate, the sudden downturn in home equity borrowing could make it difficult for homeowners to recoup their costs once a home is sold.
For those looking to remodel, other financing options exist versus the traditional Home Equity Line of Credit (HELOC). While HELOC interest rates (7.65% APR national average) are generally lower than those of credit cards (13.82% APR national average) or personal loans (12.78% APR national average), there are instances when a credit card may make more sense (e.g., using a low-introductory rate or fixed 3.99% APR to fund a small remodeling project until the balance is paid in full.)
In most cases, the interest on HELOCs is tax-deductible - unlike a conventional loan, which may be fixed. However, the rates are variable, and can rise or fall based on market conditions. It's best to always pay close attention to the most current rates and choose the finance method which fits your needs the best.
So before you decide which loan is right for you, consider the following:
Prioritize your remodeling projects.
Look at what comparable homes are selling for in your area and what features they include. You may decide that the cost to add an outdoor patio or an extra room is more than you can recoup once you're ready to sell the house or are planning to move in the next year. Consider a minor improvement (e.g., new kitchen cabinets and a sink) instead of a major kitchen remodel - the costs of which you can recover once your home is sold.
Create a budget you can afford.
A HELOC is basically a line of credit that you make monthly payments on for the borrowed amount. Should you get approved for an amount greater than what your remodeling project calls for, use only what you need and avoid spending the difference on unnecessary luxury items. Your goal should be to create value in your home... not incur additional debt.
Shop for the best rates.
The market for loans is very competitive. Comparison shop for the best rates online. When shopping for a HELOC, be aware of the following charges: closing costs, commissions, check writing, appraisal, or maintenance fees. If using a credit card, avoid low teaser rates that may suddenly escalate after a brief introductory period. Determine if the rates you're comparing are competitive once any fees are integrated.
There are other choices you will be faced with when applying for a loan, like being able to pre-pay your balance without penalty, or converting a HELOC to a fixed loan when interest rates rise. Whichever loan you decide to choose, go with the one that offers you the greatest degree of flexibility and the least amount of restrictions.
Once your home improvement project is complete, you'll take comfort in knowing that the pleasure you receive from your investment far outweighs the time you took to research your options.
Source: Informa Research Services
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