| You can borrow from a bank, a savings and loan, a | | | | a second mortgage on your property. Thus you have |
| credit union, or a mortgage banker. You can even | | | | two payments-your existing first mortgage and the |
| borrow the money online over the Internet. Here are | | | | new home improvement loan. Generally, you must |
| the most common types of borrowing. | | | | maintain a loan-to-value ratio of 80 percent, but you |
| FHA Title 1. These are mortgages insured by the | | | | are allowed to add construction costs to the value of |
| federal government. The biggest advantage is their | | | | your property. |
| high loan-to-value ratio (how much of your home's | | | | Pros |
| value you can borrow against). | | | | 1. Usually available for full amount of renovation |
| Pros | | | | 2. Competitive interest rates |
| 1. Financing up to the full value (100 percent) of your | | | | 3. Interest deductible up to limits |
| home | | | | Cons |
| 2. Competitive interest rates Usually quick funding | | | | 1. Lender holds back the money in stages until the |
| 3. Interest deductible up to limits | | | | work is completed, often causing significant delays |
| 4. Minimal appraisal required | | | | 2. Money can be used only for the renovation project, |
| 5. Available from most banks | | | | not for living expenses |
| Cons | | | | 3. Home must qualify through appraisal |
| 1. Maximum loan limit (currently $25,000) | | | | 4. Borrower must fill out lots of paperwork and come |
| 2. Money must be used for functional repairs or | | | | up with complete plans, estimates, and a list of |
| renovation (not for adding a spa) | | | | contractors |
| 3. Home must be owner-occupied | | | | 5. Home must be owner-occupied |
| Become familiar with LTV (loan-to-value) ratios if | | | | Home Equity Loan |
| you're going to put your property up as collateral. An | | | | A home equity loan is like a home improvement loan in |
| LTV is the percentage of the home's appraised value | | | | that it puts a second mortgage on your property. |
| the lender will loan. For example, an 80 percent LTV | | | | However, use of the money is not restricted to just |
| on a $100,000 house is $80,000-the maximum loan. All | | | | home improvement. |
| lenders on real estate live by LTV limits. Some will lend | | | | Pros |
| only 80 percent LTV. Some put the limit at 60 percent, | | | | 1. Can be used for any purpose |
| while others go to 90 percent or higher. Also, be | | | | 2. Competitive interest rates |
| aware of CLTV (combined loan-to-value) ratios, which | | | | 3. Interest usually deductible up to limits |
| are based on the total of all the mortgage loans on | | | | 4. Quick funding, usually within two weeks |
| your property. Similar limits may apply here as well. | | | | 5. Usually available as a revolving line of credit, allowing |
| Credit Cards | | | | you to borrow up to the maximum at any time and |
| A credit card loan is probably the most expensive | | | | pay back any amount at any time |
| way to borrow. You can simply get a cash advance | | | | Cons |
| to pay for labor costs, or charge the materials on your | | | | 1. Usually limited to 80 percent loan-to-value ratio (loan |
| card. | | | | can- |
| Pros | | | | 2. not be more than 80 percent of your home's value) |
| Money readily available to anyone who has a credit | | | | 3. Often contains a substantial prepayment penalty if |
| card, up to its limits | | | | you want to sell or refinance and have the home |
| No appraisal required | | | | equity loan removed |
| Available everywhere | | | | 4. Home must qualify through appraisal Home must be |
| Cons | | | | owner-occupied |
| Highest interest rates, often 18 to 24 percent | | | | Beware of new mortgages offered for more than |
| Interest not deductible | | | | your home's value-typically advertised as 125 percent |
| Home Improvement Loan | | | | mortgages. The interest rate is often higher than the |
| A home improvement loan is actually a construction | | | | going market rate. Further, the IRS may consider all or |
| mortgage on your property. Your home is the collateral | | | | a portion of the amount to be a personal loan. Thus, |
| and you are paid as the work is done. Available from | | | | the interest may not be tax-deductible, and the loan |
| banks and some savings and loans, the loan is actually | | | | may tie up both the property and you personally. |