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When Marina Vaamonde and her family started buying a new house last year, they faced a common problem in today’s real estate market – low prices and low prices.

Vaamonde wanted to update her Houston, Texas home with more space for her family and a workspace for those days when she worked from home. But finding something that would meet their needs in their current area proved difficult. The Vaamondes have decided to renovate their current home to suit their needs.

The renovation allowed them to stay in the same area next to the children’s school and required less financial outlay than buying a new house. “I’m glad we stayed and made repairs, and didn’t immediately buy something,” Vaamonde says.

The Vaamonde experience is not unique. The rise in remote work caused by the pandemic has increased the need for more space at home. Because many homeowners are unable or unwilling to pay today’s higher prices to move into a larger home, more homeowners are renovating their existing space as a solution. Home values ​​skyrocketed homeowners sit on the well of available capital which can be used to finance a home renovation project.

But before you start a major renovation thinking it will be cheaper or easier than buying a house, here’s what you need to consider and how to fund the project.

What to look for before repair

A clear understanding of your long-term goals is an important first step when making major changes to your home. “What are the plans for this house after the renovation is completed?” asks Angela Moore, CFP and Founder Modern money educationfinancial education firm.

If you plan to live in your home for the long term, the upgrades you invest in may be different than if you plan to sell your home in the next few years or rent it out. No matter which parts of your home you want to remodel, the planning process will be the same.

Budget extra money

Supply chain disruptions and labor shortages have increased the cost of building materials. When evaluating the cost of repairs, expect to pay more than you did a few years ago.

But even under normal circumstances, you’ll want to budget for contingencies when renovating your home. “You always have to have a buffer because something unexpected can always happen,” says Moore. Vaamonde is also a real estate investor and always plans for renovations to cost 20-25% more than the listed price.

Think how long you can go without space

There is a cost to renovating a home that goes beyond the sticker price. Consider the hassle and potential costs associated with not being able to live in your home or use certain areas for an extended period of time. You may have to deal with noise, dirt and people coming in and out of your house all day long.

Given the additional delays you are likely to face right now, this could impact your repair decisions. Vaamonde wanted to renovate the kitchen as part of a renovation, but ultimately decided against it. “When we started looking at prices and how long I would be without a kitchen. I just couldn’t bring myself to go down that path,” Vaamonde says. Just replacing the flooring, updating the bathrooms and creating a small workspace in the hallway took four months, she said.

Find a good contractor

Vaamonde hired a contractor she had worked with before. “What I like about it is that it’s not the cheapest, but I know it will do the job well,” she says. She also knew that the project would likely take longer because this contractor tends to be in high demand and manage multiple projects at the same time. But it was worth it, because she felt that she could trust him to do the job without any additional control.

When looking for a contractor, look for reviews and see if you can find references from former clients. If possible, find photos of previous works or see them firsthand. According to Moore, it is extremely important to study the contractor before giving him money or signing a contract. Ask a lot of questions about the cost, timing of the renovation, and the need for permits.

How to use home equity to pay for repairs

As home prices rise, more homeowners are able to use their home’s equity to fund renovations.

Converting your home’s equity into cash can be a great way to pay for a renovation if you don’t have extra cash or don’t want to use your savings. Common home equity loan options include:

Each type of funding has its pros and cons, so it’s important to understand your options. “Looking at funding, there are many different ways to do things. And the right path depends only on your situation,” says Moore.

Cashing out a refinance replaces your existing mortgage with a larger mortgage loan and you pocket the difference. When interest rates are lower than your current mortgage rate, it makes more sense because you are lowering your interest rate on the entire loan amount.

When interest rates are higher than your existing rate, you can only keep your mortgage and take out a smaller secondary loan. A home equity loan allows you to keep your existing mortgage while borrowing against your home with a separate fixed rate loan.

HELOC is similar to a mortgage loan, except that it usually has a variable interest rate. However, with HELOC you will not receive the money in a lump sum. Instead, you will have a limit on what you can borrow and you can withdraw money as needed. This way, you will only pay interest on the withdrawn money, rather than paying interest on the entire amount from day one.

professional advice

Make room in your renovation budget for unexpected costs and delays, especially given the supply chain disruptions and labor shortages we currently face.

Consider the Risks of Equity Borrowing

Any time you borrow money to pay for home renovations, it’s important to understand the risks and account for all costs.

When you use your home as collateral to borrow money, it is considered a secured loan or secured line of credit. This type of lending is less risky for the bank and usually has lower interest rates. The downside is that if you don’t pay off your loan, you could lose your home. Also, if you increase the amount of money you borrow, you will have a smaller profit on the sale or, in the worst case, you may owe money at the close if the housing market falls (although experts don’t expect house prices to crash) .

When comparing lenders and weighing the advantages and disadvantages of each type of home equity financing, look at the total cost, not just the interest rate. The initial fees or closing costs associated with equity financing can range from 2% to 6% of the loan balance. Depending on how much you borrow, the fees can be thousands of dollars. By comparing offers from multiple lenders, you can ensure that you are limiting your out-of-pocket fees while still getting the best rate possible.

Some home equity lenders waive closing costs or provide loans to the lender. Be sure to ask about this when shopping between lenders.

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