Any Financial Wizards Out There?

kberg

Ok, so now I want to get a loan to finish my basement, but I don't know the best (i.e., cheapest) way to go about it. My guess is that we are talking about a home equity loan of some kind, yes? One problem is that we refinanced the house at a decent rate about a year ago, but it didn't even cross my mind that we should have (perhaps) considered taking money out of the house at THAT time to finish the basement - BUT, since we didn't, do any of you folks have any thoughts/ideas on the most cost-effective options I may have available now?

Thanks in advance.

shack

You have two options (actually 3). This first one is the situation where you already have some equity in your home. There are many banks, credit unions etc...that will loan up to 100% of the appraised value of your home (or more depending on your credit history). Usually this is in the form of a home equity line of credit (HELOC). The rate is typically floating at prime rate or a margin above prime (prime plus 1.00%, prime plus 2.00%, etc...). The monthly payments are typically interest only based on the outstanding balance and in effect for periods of 5 - 15 years. You can borrow for any reason, including but not limited to home improvement. "MOST" financial institutions will absorb the closing costs of a HELOC (with an early termination fee for the first few years). I guess it will depend on your market but no closing costs is pretty standard on HELOCs under $100,000. The advantage of this type of loan is that you only pay interest on what you actually borrow and you control how much and when you borrow. The problem with this type of loan is that few people have any disipline and at maturity usually have the entire line funded and have to find a way to refinance. Also the rate of interest is variable with NO caps so as rates rise so does your interest costs. The best way I can describe this loan is a credit card with a large limit serured by a 2nd mortgage on your home.

Along the same vein...you can get a term note against any equity in your home, usually up to 15 years with a fixed rate and fixed payment. You have to borrow all the funds at one time so you need to have a really good idea of how much you need. Less risky from a rate standpoint (however it will be more than the initial variable rate and more that primary mortgage rates). You are reducing principal monthly. Your monthly payment will be more BUT you will be paying it off. Whether or not closing costs are waived is more of a 50/50 deal here depending on your local market. If not waived the costs can be from a few hundred to a couple of thousand dollars (but may be added into the loan).

Both the above assume that you have enough equity in your home to get a large enough loan to make the improvements. If not and you want to do the improvements, you will need to get plans for what you want to do and take them and an estimate of costs to the bank. They will have your home appraised subject to the improvements and will approve a loan based on the estimated value at completion. The bank will typically be more "hands on" monitoring the progress and invoices to make sure the improvement are completed as presented. They will have a draw period where you can borrow the funds as needed and then will set up a term loan with monthly payments. Closing costs are usually higher and almost never waived.

Another consideration is that below grade improvements to a home yield one of the lowest value gains on an appraisal. For instance, an appraiser may value the finished space above ground at $100 per square foot and the below ground space at $45 per square foot even thought they are similarly finished out (just an example and your area may differ somewhat). Of course it is much cheaper to finish in a basement than to add new above ground space...just don't expect the value of a finsished basement to be equal to above ground.

Anyway...shop around and see what is available and good luck.

warviper

HELOC is the way to go, I use it for everything. A lot better tax deductions at the end of the year, when compared with credit cards.

kberg

shack,

Thanks for taking the time to write a very detailed and informative response. I will most definitely check into the options you described.

Thanks for your input as well, warviper!

Early B.

kberg -- I thought you were going to take your time and DIY, thereby alleviating the need to borrow money for it. You know -- pay as you go. The funny thing about loans, you gotta pay them back. Do you still plan on DIY, but just need the loan to buy the raw materials?

If you decide to pursue a HELOC, is there a way to pay it back without it eating into your current household income? For instance, I plan to finish my basement as well, but don't want to borrow money to do it. So I'm working on creating an additional revenue stream to offset the renovation cost (e.g., home-based business, real estate investing, etc.). That way, if I ever need to use my HELOC for my home, it will be for essential items such as the roof, HVAC, or other expense that adds/maintains value in my home. As shack mentioned, finishing the basement only yields a marginal return on investment.

Just trying to think outside the box. Either way, I'm very interested in how you proceed. Please keep us updated. We wanna see some before and after pics!

ken brydson

Originally posted by Early B.
kberg -- I thought you were going to take your time and DIY, thereby alleviating the need to borrow money for it. You know -- pay as you go. The funny thing about loans, you gotta pay them back. Do you still plan on DIY, but just need the loan to buy the raw materials?

If it's just the materials HD and Lowes have no interest financing 12 mo deals all the time. I've been using it to death for the last 2 years of a complete remodel. Nothing like free $$. You do have to pay it back though.

kberg

Originally posted by Early B.
kberg -- I thought you were going to take your time and DIY, thereby alleviating the need to borrow money for it.

Actually, I was thinking of a number of options:

(1) Contract the whole thing out via a loan and have it all done at once (not a financially viable option)

(2) Save up $ and get it done in a phased approach by contracting folks who know what they're doing

(3) Save up $ and get it done in a phased approach by contracting some of the work (such as electrical) and doing some myself with help from a buddy

(4) Save up $ and get it done in a phased approach by doing it all myself (not necessarily the most intelligent option)

I'll probably go with (2), maybe (3), we'll see. And yes, before and after pictures will be taken. In fact, I should have already started taking a pic or two before now, as I am in the process of getting rid of a LOT of garbage collected over the years, and just THAT has made a HUGE difference in appearance!

Dennis Gardner

Option 3, save up $ and do as much work yourself makes the most sense.

As it isn't a required living space, time isn't as critical as a bed, bath, kitchen would be.

Researching your options on DIY helps take up the time while saving up $.

Pride of DIY welldone is better than most anything.

Pride of "Totally paid for!" IS better than anything with payments!:D


Good luck,

Dennis