Making Your Home’s Equity Work For You
When do you know it’s time to make some major changes in your home? Most likely when you can’t bear to look at your old bathroom fixtures and cracked tiles or the outmoded kitchen cabinets and shabby vinyl floor. Or it could be that you need some additional space to accommodate your growing family. Regardless of your reasons, you’re certainly not alone when it comes to remodeling your home.
Demand Drives New Products and Services
Even when the stock market falters or mortgage rates rise, economists seem to agree that home building will continue to grow because rising home prices permit the homeowner’s equity to be reinvested. As a result, renovations have become more upscale and home remodeling businesses have expanded to meet the demand for more sophisticated projects.
The Open Kitchen
The most popular remodeling job is for the kitchen, which also leads in adding resale value to the home, according to Remodeling Magazine. One of the hottest trends is the “open design” kitchen, which is incorporated into the overall living area of the dining room, den and/or living room. Additionally, kitchens are being rebuilt larger to accommodate more people, food preparation, and storage. Space is being designed more efficiently with rollout shelves, lazy Susans, trash compactors, recessed lighting, and underground cook-top venting. Many designs include dual work areas with separate sinks and cutting areas or large granite “islands” doubling as preparation and dining surfaces. Skylights, dimmable lighting, stainless steel appliances, and wine coolers make the kitchen an attractive setting for entertaining guests while preparing a meal.
Manufacturers have developed many efficient appliances to meet the needs of the time-challenged consumer. For example, there are convection ovens that move heated air directly onto the food instead of into the oven cavity, reducing cooking time up to 25%. And at least one manufacturer offers an oven that uses intense light to reduce cooking time. Meanwhile, the so-called smart appliances on the market can interact with your computer, so you can activate or control the dishwasher, oven, heating/air conditioning, or Jacuzzi over the Internet.
The Lavish Bath
Bathroom improvements are also extremely popular with homeowners, who are eager to sacrifice their small spare bedrooms to make way for huge bathing areas that often include a hot tub, separate shower, dual sinks, heated towel racks, bidets, and lavish marble floors and countertops. Moreover, ceilings are often being raised to the roof to create an atrium look with skylights and small trees, and it is not uncommon to find dedicated telephones for the toilet and the Jacuzzi.
U.S. Department of Housing and Urban Development, Washington, DC (202) 708-1112, http://www.hud.gov
NAHB (The National Association of Home Builders) Research Center (800) 638-8556, http://www.nahbrc.org
National Kitchen and Bath Association (800) 843-6522, http://www.nkba.org
National Association of the Remodeling Industry (800) 611-6274, http://www.nari.org
Remodeling Online, http://www.remodeling.hw.net
Canadian Home Builders’ Association, http://www.chba.ca
Better Homes and Gardens, http://www.bhg.com
Home Ideas, http://www.homeideas.com
Home Doctor, http://www.homedoctor.net
The New Home Worker’s OfficeAn office at home is also in demand now, as workers choose to “commute” from home — saving time, dry-cleaning bills, and transportation hassle and expense to become more productive and efficient. Since electronic communication can deliver corporate office and customer site meetings at home, an attractive, workable home office is needed to accommodate this new work culture.
How to Finance Renovations
Home equity loan: Line of credit, at fixed or adjustable rates. Interest generally tax deductible on principal up to $100,000. Banks, credit unions, other lenders.
Second mortgage/refinanced mortgage: Based on percentage of home value minus amount owed on first mortgage. Fixed rate. Interest generally tax-deductible on principal up to $100,000. Banks, credit unions, finance companies.
FHA Title 1 Home Improvement Loan: up to 20 years. Home improvement lenders.
Cash value life insurance/profit sharing plans: Interest not tax deductible. Insurance companies, employers.
While these innovations are impressive, so are the costs. A standard kitchen redesign can run $20,000 to $40,000. Add in granite countertops and special appliances, and the price can climb well over $60,000. Although time-saving and fun, these new appliances can cause sticker shock, so comparison shop.
But before you even think about making a home improvement, you need to find a reputable contractor, and that may not be easy. Even if you know one, a reputable contractor may have a long list of projects. It may take months or even years to start the work, as the boom in home renovation demand often exceeds contractor availability.
And then there are some horror stories to give you pause. For example: A homeowner [in Canada] wanted his fire-damaged house renovated. The contractor asked to be paid in cash to avoid workman’s compensation and taxes. The homeowner agreed, hoping to save a few bucks. Later, he found the work unsatisfactory and, unable to work things out with the contractor, decided to sue. The court did assess damages, but held that because the homeowner had participated in an illegal agreement [to avoid taxes], his right to receive compensation from the contractor was voided.
Other common stories include contractors who never show up; contractors who start the job and then disappear for weeks (leaving portions of the house open and exposed to the elements); and contractors who fail to return at all and never finish the job. Of course, then there’s the contractor who does shabby work that’s not up to code. Since the work can’t pass inspection, sometimes the whole job needs to be redone.
In response to these scenarios, the American Financial Services Association (AFSA) has developed a voluntary standard designed to protect against home improvement scams. Under AFSA guidelines, members who provide financing agree not to make final payment until they receive a certificate signed by the homeowner and contractor acknowledging satisfactory completion of the work.
The best and most obvious way to avoid problems is to get the contract in writing. A worker injured on the job without workman’s compensation insurance could sue you personally. There may also be complications with your homeowner’s insurance if the contractor is not properly licensed. Without a contract, you have no recourse against shoddy work, work not done as specified, cost overruns, and potential legal proceedings.
A written contract will state the proper building materials to be used and that warranties from manufacturers be honored. Additionally, it will specify exactly how “change orders” from the homeowner will be handled by the contractor. If your contractor is interested in cheating or cutting corners, chances are it could happen on your project. Remember, laws are created to protect both you and the workers. Trying to save money illegally could end up costing you more.
Do Your Homework on Your Biggest Investment
This may be a great time for home renovations. Sophisticated new appliances and larger living areas can create beautiful, stress-relieving surroundings while also saving you time and money. Banks are eager to make home equity loans, and loan interest is tax deductible as well. So take the time to find a reputable contractor. Do the research, talk to your friends, check references, get several estimates, and most important, get the contract in writing. These simple steps could keep your new dream home from becoming a “money pit.”
Points to Remember
1. Remodeling demand is driving new product technology and costs.
2. Kitchen remodeling ranks first in popularity and resale value.
3. Retain a reputable contractor through references and estimates.
4. Do not proceed without a written contract.
5. Project financing is available through home equity loans, mortgage refinancing, and home improvement loans from banks, credit unions, and insurance and finance companies.
Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.
Copyright © 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.