Home improvement/equity loans... overview sought

In My Humble Opinion
1

So my wife (the lovely doper Araminty) and I own a house and we’re considering doing some medium sized remodelling… ie, putting in new carpets and floors and stuff, but nothing really structural. We have a mortgage through Bank of America, which is fixed rate, had a large down payment, been paying for 5 or so years.

So, I feel like there must be some kind of transaction we can do where Bank of America pays for the house improvements and our mortgage payments go up slightly, on the theory that since the bank owns the house anyhow, it’s in their interest for it to be improved and increase in value. And it seems reasonable for us also, since presumably when we sell the house (we don’t intend to live here forever), a fair bit of the investment in improvement will come back in the form of higher price.

We live in Silicon Valley, btw, where the housing market has not gone totally kaput the way it has some places.
So, a few questions:
(1) Does this make general sense? Is my understanding of the situation even remotely correct?
(2) Is this a home equity loan? A home improvement loan? Both?
(3) Is this something that makes financial sense or is this one of those things that it’s generally conceded only idiots do?

Thanks! And any other general advice would be welcome.

2

Max, what you would want to do is apply for a home equity line of credit. This works as an amount you can borrow against your home’s equity. The key consideration is how much you owe now vs. how much the home is worth. If those figures are close together, then expect the bank to be reticent to loan. If you have a $300,000 home and owe $150,000, they will usually be happy to extend credit.

So from there you go through the paperwork and will usually have a variable rate of interest, which would be low right now, but could, and probably will go up over time. From there you have to pay the interest every month, but can and should plan to pay more. As to whether this is a good idea this is something only you and your budget can answer. Many, many people do it however and it isn’t an innately risky or dumb thing to do.

3

The home market in Silicon Valley Has not gone Kaput. Last year I purchased a home for $250,000, two years earlier it sold for $585,000. My home was valued at $750,000 now I am upside down on my loan of $423,000. So unless you have a really high end home (over 1M) or you put a really large down (40% or more) you may have little equity.
(1) does it make sense. Look at the amount of time you will be in you present home. Will the improvements improve your life enough to be worth it? And how much will the improvements increase the sale price of your home, ie return on investment (ROI). Or are you going to over price your house in the neighborhood.

(2) Look at the total increase in payments between a new loan or an equity loan. Getting a new loan for home improvements may mean a higher or lower intrest on your total loan. Plus total closing costs. An equity loan will have a higher interest on the equity line ballance only.

You will have to get all the numbers before anyone can tell you if it is a good idea or not.

4

Can you do your renovations one project at a time and just pay for them outright instead of going into more debt for them?

5

Disclaimer - info below only applies to Massachusetts banks. I did not contact any California banks, so I have no idea if the laws or practices there are different.

The only way to keep a single mortgage and get cash in your pocket is to refinance. This may or may not work for you - depends on your current loan to value ratio (i.e. how much equity do you currently have in your house), and your present interest rate. We found that banks will usually charge a higher rate if you’re “cashing out” than you would if you just refi’d your existing principal balance.

A home equity loan is just a vanilla second mortgage. They agree to lend you money at a fixed or variable rate, and you get it all at once, and can do anything you damn well please with it. If you do spend it on home improvements, you can deduct the interest from your taxes. Since you’re getting all the money up front at once, you need to decide the exact amount you need so you don’t over or under borrow.

A home improvement loan is pretty much just a restricted home equity loan. Some places will give you a slightly lower rate, in return for control of the money - they agree to lend you $50k for an addition, but you don’t get any of the money until the work is in progress. You have a plan to follow, and they send out an inspector when you want a release of the funds - say you get 25% when the framing is done, another 25% when the drywall is up, etc. These are more usual for new construction loans, but we did find a bank or 2 that did it for additions. The bank offers a lower interest rate than they would for a standard home equity loan, because they’re confident the value of the home will increase as they lend you money - you don’t get cash unless their inspector is satisfied that work is being performed.

A home equity line of credit is a loan where you make withdrawals as you go, up to a fixed ceiling. So you can withdraw as you go during your project, and only pay interest on the amount you’ve actually withdrawn so far. All of these we found were variable rate, fixed for 2-5 years at first. Also, the ones we found had 2 periods - a 10 year draw period, followed by a 10 year payback period. During the draw period, you can withdraw money as often as you like, up to the ceiling. You only have to pay interest on the loan, not principal, though that’s a fools game. After 10 years are up, you can no longer withdraw, and any principal balance left converts to a 10 year variable rate mortgage.

Having reread your OP - new carpets and floors probably isn’t something you want to borrow money over. It won’t increase the value of your house, the way an addition of finished basement would.

6

That’s where my question was coming from, too - new carpets/flooring isn’t that expensive, and you certainly don’t have to do the whole house at once.

7

Well, we’re still getting estimates and stuff. But the first one we got was around $20,000, I think… Maybe that was for some SUPER-high-end place or something.
In any case, thanks for all the advice/feedback.