Tips for Fi­nanc­ing That Home Re­mod­el­ing


Sum­mer is com­ing, and home­own­ers may be con­tem­plat­ing re­mod­el­ing. The re­cov­ery in hous­ing prices means more peo­ple have eq­uity that they can tap for projects. As in­ter­est rates tick up­ward, though, home­own­ers may want to con­sider whether to draw on that eq­uity.

“I do think the rate land­scape is a fac­tor at this point in time,” said Greg McBride of How will you pay for a project? If you have cash, con­sider us­ing it, be­cause in­ter­est rates paid on sav­ings are quite low, said Robert Sch­man­sky of Clear Fi­nan­cial Ad­vi­sors, out­side Detroit. If you must fi­nance the work, a home-eq­uity loan or line of credit “isn’t the end of the world,” he said.

As in­ter­est rates rise, re­fi­nanc­ing a mort­gage is be­com­ing less at­trac­tive. The aver­age rate on a 30-year, fixed-rate mort­gage was 4.03 per­cent at the end of April, ac­cord­ing to Fred­die Mac. Home-eq­uity lines of credit func­tion like a credit card rather than a tra­di­tional term loan. Lines of credit, or He­locs, are more com­plex to man­age than a tra­di­tional sec­ond mort­gage and come with vari­able in­ter­est rates, typ­i­cally tied to the prime rate. That means monthly pay­ments could rise. Lines of credit typ­i­cally have a 10-year “draw” pe­riod, dur­ing which bor­row­ers use the avail­able funds as nec­es­sary and make in­ter­est-only pay­ments. Af­ter the draw pe­riod, the lines usu­ally con­vert to reg­u­lar in­stall­ment loans, with monthly pay­ments over an­other 10 to 20 years.

The aver­age rate on a home-eq­uity line of credit is 5.45 per­cent, Mr. McBride said, al­though some lenders of­fer “teaser” rates as low as 2.99 per­cent for an in­tro­duc­tory pe­riod, typ­i­cally six months. Home-eq­uity loans, usu­ally made at a fixed-in­ter­est rate, may be more palat­able than lines of credit as rates rise. But many larger banks stopped mak­ing them, pre­fer­ring to of­fer lines of credit, which re­duce the lender’s risk from ris­ing rates. Ul­ti­mately, the con­sumer’s risk tol­er­ance is a fac­tor. “If they don’t like the pos­si­bil­ity that the rate can change,” said Mike Ki­nane of TD Bank, “then the loan prod­uct is prob­a­bly a safer bet.”


EQ­UITY OP­TION The re­cov­ery in hous­ing prices means that more peo­ple have eq­uity in their homes that they can tap for projects like up­dat­ing a kitchen.

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