Value

4 Ways We Got More Value from Our Home Improvement Loan

Matt DeFour, 35, lives with his wife and two sons in a ranch-style home in Madison, WI. To fund a basement renovation, including a new bedroom, bathroom, den, and office area – with as little debt as possible – DeFour came up with creative home renovation financing solutions. Here’s how he got the most out of his home improvement loan.

We bought our house in 2013. It’s a ranch house with a nice, big backyard. It had a finished, walk-out basement of about 700 square feet, but it was really shabby. There was no pad; it was just carpet on concrete. The walls were drywall but the ceiling was drop tile, and it felt musty, damp, and uninviting. We really wanted to make a basement that felt like a part of the house.

My wife, Autumn, and I have had this project in mind for a while, so we started doing some work ourselves in preparation. I did all the demolition work, which saved about $1,500 to $2,000. I knocked out all the walls, closets, fixtures, and ceiling. There were some cracks in the exterior concrete walls, so we made sure that they were patched up and that we weren't having water issues in the basement.

This year we decided to really accelerate the project and get the whole thing finished.

1. Look for deals in unusual places

Through an auction at the nearby elementary school, we bought some design consulting work from a local housing remodeler for a discount. The value for four hours of design work was $360 and we bought it for $255. We worked with him to design the basement we wanted. The design included a bathroom, a bedroom, a TV den, a computer workspace, and a reading nook underneath the staircase.

Before we did anything more, we got a few estimates from general contractors. We decided to do the general contracting ourselves to try to save money. We thought, “Let’s bid out the electric. Let’s bid out the plumbing. Let’s bid out the HVAC.” I was kind of learning as I went. I talked about what steps to take with the original designer, then, every time we had a different contractor come through, I’d ask, “What should we be thinking about next?”

We probably saved about $10,000 that way.

We had been paying for everything up to that point with cash. We didn’t want to borrow money. We really believe in not going into major debt for things. But we knew we were going to have to take out a loan for this project – we didn’t have the remaining cash lying around.

2. Consider your options for financing

We’re using a combination of a home equity line of credit (HELOC) and a cash-out refinance on our mortgage to pay for the project. Here’s how:

We initially wanted to do a cash-out refinance on our mortgage to pay for the project. The way that works is that the new mortgage loan is for a larger amount than the existing mortgage, and you get the difference between the loans in cash (minus the closing costs for the refinance loan).

When we bought the house, we made sure we put 20% down. After paying the mortgage for about four years, we owed about three quarters of the purchase price.

But we found that in our case we had to complete the work and increase the value of our house before a cash-out refinance could be secured. The bank suggested we take out a home equity line of credit (HELOC) in the short-term to fund the project.

Then, when the project was finished, we were able to do the cash-out refinance of our existing mortgage based on the new value. Our home had gone up in value by about 30% since we bought it in 2013, thanks to the combination of the renovation and skyrocketing home values across Madison. We’ll get the difference in cash and use it to pay off the HELOC.

The reason we’re doing that is we’re getting a better rate on the refinanced mortgage than the HELOC. The HELOC is adjustable, which means it will likely go up, and is right now at 4.25%. The refinanced mortgage is fixed at 4%.

Our mortgage is growing by about a third, but we’ve still got roughly 26% equity in our home.

  • Popular Types of Financing

    Homeowners have several options for financing a major home renovation.
  • Cash-out refinance

    In a cash-out refinance, you’re paying off your old mortgage with a new, larger mortgage and getting the difference in cash, less amounts for closing costs for the refinance loan. You can use the cash to fund your project, or, like DeFour, use it to pay off another loan with a higher interest rate.
  • Home equity loan or HELOC

    A home equity line of credit (HELOC) allows you to borrow a percentage of your home’s value – often up to 80% – minus the amount of your home loan. You can draw from the credit line during a fixed period, usually five to 10 years. A home equity loan is similar, except you get a lump sum of cash. Typically, the interest rates are fixed on a home equity loan and are adjustable on a line of credit.
  • Credit card

    You can finance home renovation costs with a credit card, but it’s important to be mindful of the interest rate you might have to pay on the purchases. Consider exploring new cards offering low or 0% rates for a promotional term.
  • Savings

    Saving up and paying for your project with cash is the least expensive option, but takes the most patience.

3. Expect some snags

There are some tradeoffs with our chosen route to be aware of. One downside is we’ve had to pay interest on the home equity line while we’ve been getting everything finished. We also have gone from a 26-year mortgage back to a 30-year mortgage, and our monthly payments are up by about $120. And we’ll pay more in interest over the next 30 years than if we would have stayed with a 26-year mortgage.

We’ve also endured some delays because we’ve had to schedule a bunch of different contractors. We have separate contractors for electrical, plumbing, and HVAC, and framing and finishing. Getting all that coordinated, and getting different people to come in at different times, has taken a lot longer than expected.

4. Weigh benefits against costs

Renovating has tremendous appeal for us over moving to a new home. We’ve also upgraded our roof, furnace, water heater, and gutters over the past four years. Another four-bedroom, two-bathroom house in our area at the price point of our current home just wouldn’t be nearly as nice as ours. Plus, it wouldn’t feel like home.

If you’re considering a home remodeling project, I would say pay for as much of it in cash as you can. Try to save as much as you can and don’t just borrow. That said, if you really want to do something, don’t put it off forever! Because you should enjoy the home you have.

We’re looking forward to having a place where we can have movie nights every weekend and for the kids to play and study. We’re also looking forward to having a really nice guest room so friends and family who are spread out all over the country can come visit us and stay in a nice bedroom with their own bathroom. And at some points our boys will be teenagers, so going from one to two bathrooms is essential. It’s going to be really great.

It’s an investment. It’s definitely an investment in your future and in your present.

As told to Deborah Ziff.

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