Your castle will someday need repairs or improvements because of wear and tear, forces of nature, accidents, mischief, growing families or the decor's lost appeal. When the time comes, you will need to decide upon the work, who will do it and where you will find the money. You can call upon your home's equity -- the difference between its value and what you already owe -- or upon a home improvement loan.
Amount and Payment
With a home improvement loan, you borrow a set amount based upon the contract price or an estimate thereof; the lender may pay the contractor directly, though some states might require at least the borrower’s name on the loan check along with the contractor. Often, the lender writes the checks as stages of the project are completed. Home equity loans are not capped at the cost of the work, so you can use the funds for other needs or wants; you decide when to pay the contractor and you must inspect and approve the work or arrange for someone to do it.
You can lose your home if you miss payments on a home equity loan; the bank can foreclose on your home and recoup what you owe, up to the amount of equity. Home improvement loans take either the secured or unsecured form. With an unsecured loan, the lender cannot take the home as collateral. It must first get a judgment; even then, in most states, you can exempt, or keep, all or a portion of the home’s equity out of the lender’s hands.
The federal government offers many home improvement loan programs. For example, the Federal Housing Administration guarantees home improvement loans for those with limited home equity. Built-in appliances, energy-saving improvements and making sinks and cabinets more accessible are allowed through federal programs, but not outdoor fireplaces, swimming pools or other luxuries. Normally, you don’t need to put up the home as collateral if the loan stays below $7,500. Generally, home equity loans do not qualify; however, if you are at least 62 years old and need extra money, you can get an FHA reverse mortgage; you repay it if you leave your home or don’t meet your mortgage obligations.
You get tax breaks from paying interest on home equity and secured home improvement loans if you itemize deductions. For home improvement loans, you can write off the interest on mortgages up to $1 million, or $500,000 if you are married but file separately. Home equity loans used for reasons other than buying, building or improving your home are capped at interest on the smaller of $100,000 ($50,000 if married filing separately) or the home equity. Mortgage points, also called loan origination fees or discount points, are fully deductible if you have a home improvement loan.
Alternatives to Loans
You can turn to homeowner’s insurance rather than a loan if you need repairs because of fire, vandalism, storms or other reasons covered by your policy. If you need immediate repairs or only minor ones, you may consider pulling out your credit card; you can withhold credit card payments for defective work until it is remedied.
- Realtor.com: Home Improvement Loan
- HUD.gov: Fixing Up Your Home and How to Finance It
- HUD.gov: Top Ten Things to Know If You Are Interested in a Reverse Mortgage
- Internal Revenue Service: Publication 936: Home Mortgage Interest Deduction
- Internal Revenue Service: Publication 530: Tax Information for Homeowners
- Montgomery County, Maryland: Office of Consumer Protection: Guide to Home Improvements
- Burlington County (New Jersey) Home Improvement Loan Program
- Connecticut General Assembly: Office of Legal Research: OLR Research Report: Predatory Lending Laws; Jennifer Gelb
- GovLoans.gov: Housing
- Federal Trade Commission: Consumer Information: Hiring a Contractor
- Texas Department of Insurance: Homeowners Insurance
- Federal Trade Commission: Consumer Information: Home Equity Loans and Credit Lines
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