Blow-by-blow account of a housing addition

This is a guest post from JerichoHill.

Recently my fiancée and I have engaged in a bit of home-renovation. Several years ago, Julie bought half of a duplex in a suburb of Washington, D.C. It is rather small for a house today, with two bedrooms, one bathroom, and a finished basement. The bedrooms were small because the duplex was constructed in the early 1960s. Her place was large enough for a spoiled-rotten dog and the occasional stop-over from the best-fiancé-ever but wasn't going to be large enough for the two (WOOF!) three of us, let alone a family.

Costs

Because of the size of our house, Julie and I wanted to build out as large of an addition as we could. Our goal was to build an addition out-the-back flush with the property line and party wall for the basement and both floors. The addition space would house on the first floor our new kitchen, a new master bedroom on the second floor, and a den/bedroom in the basement. We also had several renovation wants for the existing structure. Would we be able to afford our wishes?

We first had to check with the city's planning board to ensure we had the necessary permits and, if necessary, special exemptions or variances from the city. A well-thought out presentation which is quick and to the point stands a good change of winning over your planning board. We watched several petitioners in front of us engage in convoluted debate with the planners and not get approved. We were approved easily because we had researched the codes, had a case for why we needed what we were requesting, and presented our needs quickly and coherently.

There are several financing options available for a home improvement project:

  • You can self-finance,
  • You can refinance your existing mortgage,
  • You can take out a home equity line of credit, or
  • You can take out a home equity loan.

In our case, home prices had skyrocketed since Julie bought the house, so we had a large sum of “equity” to tap. Equity is essentially the difference between what your house is appraised to be worth and your outstanding mortgage balances. I wouldn't recommend using “equity” to finance consumable spending, but I've heard of folks using equity for credit card consolidation for lower rates (secured by your home). We felt the equity in our home was the strength we should build on for our project. Your situation may be different, and you should consider reading about all your options, and utilize your financial situation's strengths when choosing your method of financing.

To learn about differing methods of financing a home addition, Bankrate has some excellent free guides. Here's how I think the various financing options break down overall:

  Good For: Be Aware Of:
Home Equity Loan One-Time
Large Projects
Most are Variable Rates
Home Equity
Line of Credit
Many
Ongoing Projects
Terms, Pay Scheds
Refinance To get lower
interest rates
Closing Costs,
Rate Change
Self-Finance Small Projects Your Checking Balance

I found in talking to potential lenders that they will typically write a home equity loan that brings your debt-to-value ratio to no higher than 80%. You can go higher, but it costs more in fees and in rates. We did not feel a need to go higher than an 80% DTV ratio and did not want to pay a premium or potentially put us in harm's way if the market turns drastically. What we didn't know was that the home-equity loan provider will purchase your second lien (unless they are in first or second position already), and that left us with a smaller budget than we had at first thought we had. But we made due, and it wasn't an issue.

After we knew the probable size of our home equity loan and available cash-on-hand, we met with our contractor / architect to confirm plans and ensure that we had enough financing to cover expected costs and potential over-runs. Our contractor walked us through his estimated budget and worked with our figures to show us what we could expect.

An advantage we enjoyed was a significant amount of liquid savings that we were able to use up front to cover quite of bit of the cost ourselves, as if we paid a down payment on our addition. Our reserves also made up for the fact that we under-estimated how long it takes to secure a loan, finish plans, and get construction approval. Because we had some reserves, we were able to start initial construction as the paperwork finished. We paid up front for many expenses and left a portion of our cash-on-hand budget available for the end of the project if we needed it. Looking back, I didn't feel comfortable starting without those important details taken care of, but our timetable and lack of experience didn't give us much of a choice.

Of course, before signing any papers we wanted to make sure we could afford the additional mortgage payment. I'll talk about how I did that and discuss dealing with lenders next Saturday. We'll finish with some great tips on saving thousands on your home addition!

Capitalization

I next had to navigate the mine-ridden battlefield of loan applications. What was the best deal? How do I find it? And how would I know when I did find it?

We checked with our respective banks, thinking that our existing relationships with these behemoths (Julie and I had separate accounts in separate banks) would mean better terms. These two big banks had similar offers carrying a fixed rate of 8%. Not knowing if these were good or bad, it was time to utilize the magic of the internet.

I wanted lots of offers to compare to, and I wanted them quickly. Two popular websites for mortgage loan offers are BankRate and LendingTree. I filled out their forms and directed the offers to my spam email address, though regrettably, the phone number we used was Julie's actual home phone number. In between the hundreds of highly annoying automated phone calls seemingly from LendingTree companies, we received about 10 different estimates on rates and funding in our email inbox.

Our national banks were dead last.

I believe my grandfather once told me to buy local and finance local. Hesitant to deal with lenders over the internet, and disappointed in our national banks, I turned to the local banks. Small local banks, the theory goes, know the area they are lending in. Local banks tend to only write loans in their geographic area. They may have more favorable terms since they lack the resources to compete on location and convenience against bigger banks. In my case, this adage turned out to be correct. After doing due diligence by stopping by various bank branches and getting rate quotes, I was up to 15 different offers.

It did not take long to wean through the offers, and after a few days, I applied for a Home Equity Loan with Cardinal Bank . With the small banks I talked to, I received better answers to my questions and more personal service than I had with the larger institutions. Since home-buying involves a large sum of money and a lot of trust, I placed a good deal of value on customer service. The smaller banks tend to be more willing to hold your hand and respond to your questions more than the bigger outfits, at least in my experience. Check out your local bank to see if this idea works for you.

Prior to signing the loan documents, Julie and I sat down to look at our financial picture with the new mortgage payment. Our new combined payment was essentially double what Julie had been paying previously on her first position mortgage. I wanted to sit down and look at finances because I had been used to living with roommates and paying very little in rent. I knew that my spending patterns were about to change. I was used to a college lifestyle (cheap rent, eats, entertainment) and was about to “grow up.”

We talked about how much our combined emergency fund should be (we felt comfortable with one year's worth of living expenses). The new mortgage payment would be 36% of our take-home pay, which was quite roomy. There's even money left over in our budget to prepay, and that's a good feeling.

Good planning on your addition may mean you can find a way that it can finance itself: we turned the basement into a one bedroom suite. Eventually, this space will either house visiting relatives or children, but for awhile, we'll be able to rent it out, and we plan on using the proceeds for one purpose: prepay the home equity loan.

If everything works out, we will pay down the whole home equity loan within 6 years.

Construction

I want to end this series with the tips and tricks we've learned that are helping us save money on our construction costs. Instead of writing like a ramblin' wreck, I'm going to list the varying lessons learned throughout the construction process.

  1. Labor is expensive, so do everything that you feel comfortable doing yourself yourself. Even the little things can save a lot of money.
    • Dumpster pulls are a few hundred dollars each pull. By taking a morning to sift through the rubble in the dumpster, Julie was able to create a lot more room. I flattened out debris to put into the dumpster. These efforts saved us two dumpster pulls.
    • Keep the worksite clean. Your contractors are supposed to keep the work site clean, but they are focused on their job at hand. Rather than pay your carpenters their hourly rate to clean the job site, clean it so that all your contractors can keep focusing their skills on the tasks they do best. Just keeping a clean job site can save you hundreds, if not thousands.
    • Maintain the property line yourself, if your addition construction is going across it. There's very little a shovel, a rake, and some gloves can't handle outside, and keeping your property line clear (as well as your yard) helps keep the work flowing.
    • Use your extra dirt to fill in. While we were maintaining the property line, we took the time to even out parts of the yard. We had quite a bit of space to fill in, so we used extra gravel and soil. Our efforts allowed us to not only smooth out the yard but completely fill in space we thought we were going to have to purchase fill dirt for.
  2. Design your home efficiently
    • We put our air conditioning unit in our attic, with the ventilation system coming out of the ceiling. We not only now do not have to worry about blocking vents in our rooms, but our cooling costs will be lower because cool air falls. Brilliant!
    • Replace your old windows. Julie's windows were casement. They let in the outside environment like a sieve. We went with new vinyl windows. We also found that your local window store may have some very good deals. Some window dealers came to our house for a pressure-laden sales pitch. If you really like their product, be assured that if you don't purchase it with their one-time only discount, you're likely going to get called back in a few weeks and offered and even lower discount because they over-ordered vinyl or something.
    • Moving your bathrooms and/or stairwells are very expensive renovations. If you don't have to move them, don't.
    • Go to your local hardware store and read about, or watch, or participate in the demonstrations and classes they have on various home improvement projects. We learned how to build our own fence, install trim, take up our hardwood without damaging it, and other money-saving skills!
    • Watch where you shop. We've noticed large price differences at the stores we've visited, and we've also noticed that some stores are cheaper in some goods and more expensive in others. We have a small book we maintain as our items ledger where we can note prices and quality in the stores as we look around, and then can make our decisions later. A digital camera helps in this endeavor.
    • Recycle what you have. I mentioned earlier that we designed a one-bedroom apartment for the basement. We were also building a new kitchen. Rather than throwing away the old kitchen, we saved the cabinets and appliance and are putting them in the basement kitchen. We also saved hardwood to use for patch jobs in other places around the house.
  3. Do-it Yourself
    • With a little bit of instruction, you should be able to install your own cabinets, appliances, and trim. IKEA cabinets are especially easy to install, though there are problems with their stock and on-time delivery. It is not unusual to be waiting on cabinet doors for a few weeks from stories I have heard.
    • We're installing radiant floor heating. Radiant floor heating saves money on your energy bill in the long run, and can save you money initially if you install it yourself. It also provides a more natural and comfortable source of heat than open-air convection.
    • Storage. A two-bedroom house needs approximately a 10x12x10 space for storage of all items. This would normally cost around 200 dollars a month for rental space (plus whatever initial fees there are). To save some money, we used a free-standing garage I had available at my house (I rent). Since my roommates could not use the garage, I repaid them for the inconvenience by doing a few more chores around the house.
    • Paint. That's fairly obvious, right?
    • We took down the old and rather dingy metal fence. One thing about old fences is that they were made to stay in place, mainly by two metal crossbeams which ran diagonally across the fence posts and at an angle into the ground, which made digging them out a pain. After getting the old fence out, we bought fence posts and planks and re-dug the holes to about 2 feet down, placed gravel at the bottom, and used a level to ensure our fence would be on the straight and narrow. It takes about an hour per post unless you have a fancy digging machine. We didn't.

And most of all, know what you want, because once you build it, its in there.

Combating Murphy's Law

It wouldn't be a housing addition without delays, problems, incorrect parts, contractor issues, and code problems. These small things occur in every home remodeling project, and their primary impact is to delay your progress. We find that by having things to do, we don't get so upset by the delay.

For instance, this past week we ran the inspection gauntlet : Electrical, Gas, Water, Structural, Footer (Deck), Insulation, Drywall. We were first told that our gas plan was wrong (despite the City Engineer approving it) because you couldn't have two stoves in the same house. When an additional Inspector came and clarified that our plan was correct (Basically, city code states that in order to have an additional stove, there must be an outside exit in the room), we were able to finally pass.

However, our structural inspection ran up against a problem, our plan was again approved by the Engineer but not by the inspector. We had made the party-wall addition side with plywood and then siding/trim. Well, we needed to have fire-rated drywall in between the two. What we did was we showed the inspector we could pull off the siding and trim without damaging it (woohoo! But do this carefully and slowly) and install the fire-rated drywall and then put the stuff back on (that's where we are today). Having demonstrated this, we were able to insulate and continue the drywall schedule for the inside.

If you want to avoid delaying your construction, schedule to do stuff yourself outside when your contractors are inside, and vice-versa. We were able to keep moving on something regardless of any delay that reared its ugly little head.

Storage is becoming a big issue now that deliveries are arriving (our new IKEA kitchen cabinets, vanities, and lighting items from Lowe's). Because we have a utility room that we aren't finishing, we can store these items there. The whole house must be clear for drywall, its how the installers work.

We're done our best to communicate with our contractors to make sure they have everything they need and that we have them scheduled far in advance. It's also not a bad idea to have in your contract with them a penalty in case they disappear for awhile. Our carpenters (good ones) we didn't hear from for a week, so we got delayed a bit (we made up for this in other places to stay fully on schedule).

It's also cost-advantageous to purchase everything for your contractors. You're only paying them for the install then. Just have a place to store it.

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Christiane
Christiane
13 years ago

Its good to see another Houseblogger post here! 😉 I wanted to clarify on the types of loans available. In our case, we wanted to go from 728sf to 2140sf. This was more than just adding on a room or even a master suite. We were significantly altering the structure of our 2/1 bungalow and turning it into a 4/3, 2-story modern home. Our neighborhood home values had appreciated significantly enough that, beyond the equity we already had in our home, adding this square-footage would more than double the value of our home. Of course, we needed a loan greater… Read more »

Jeff
Jeff
13 years ago

A bit of semantics here, but you didn’t fund your addition with your home equity — you funded it with your future income. Banks and real estate agents have managed to turn the word “equity” into something that sounds liquid, which it isn’t.

But still, I have to say congratulations — sounds like you’ve done a good job of planning and shopping around. I’m sure you’ll love your new addition.

JerichoHill
JerichoHill
13 years ago

Jeff,

Of course you’re correct. I suppose the purpose of saying “home equity” is to indicate that the loan was secured by the difference between the appraised value of the home and the outstanding liens

FourPillars
FourPillars
13 years ago

I’m impressed with your planning and thinking – you’ve done a lot more than most “experienced” people. We did a gut reno of our new house – did a lot of the work ourselves and contracted out quite a bit. We had no idea what things cost and how much work it was and it was a bit of a financial disaster to say the least. The house turned out quite well and we haven’t sold it so I guess it worked out (sort of) in the end. I’m new to this site but I’ll be checking out your full… Read more »

Jason Dean
Jason Dean
13 years ago

It’s good to see a first-hand account of someone who used the internet to get a better rate. A lot of people think that local companies can always give them better prices and service, but with the internet, almost everything is local now. I’m glad that you guys were able to get a good deal and start your addition. Congratulations!

Jim
Jim
13 years ago

Don’t use your monthly budget surplus to prepay the mortgage unless you have already maxed out your retirement contributions first.

JerichoHill
JerichoHill
13 years ago

Jim,

We’ve already maxed em out =)

JerichoHill
JerichoHill
13 years ago

fwiw, there will be a 4th part of this series, detailing how to do a few big projects by yourself.

So far, we’ve

1) Built a fence
2) Installed Radiant Floor Heat

W.C. Varones
W.C. Varones
13 years ago

Then there are those who don’t understand housing math.

The story of an MBA student who thinks it’s smart to buy a 1-bedroom condo for $715,000:

http://wcvarones.blogspot.com/2007/07/poor-reflection-on-usf-mba-program.html

telly
telly
13 years ago

A mortgage payment of 36% of take-home pay is considered roomy???
Yikes!

JerichoHill
JerichoHill
13 years ago

Telly,

In the DC market, 36% of our take-home pay is considered roomy (this number includes insurance and taxes). Of course, take-home pay is affected by your pretax savings rate, which is quite large for us. Had we kept a standard pretax savings rate, it would have been around 25%.

Additionally, percentages can mean different things depending on what your overall income level is.

telly
telly
13 years ago

I didn’t realize you were including pre-tax savings. That definitely makes the mortgage much ‘roomier’. 🙂 Thankfully we live in an area where homes are pretty inexpensive, so we’re at around 12%.

Michael
Michael
13 years ago

In some cities there, including Cleveland, where I live, there are special home equity loan programs available at substantially discounted interest rates. When I borrowed under one of these programs to do major home renovations, the rate was 2% with no income limits. Before you just start calling around to banks, it may be worthwhile to investigate whether these discounted loans may be an option where you live.

FourPillars
FourPillars
13 years ago

Great series! I’d like to add that a lot of people who start renos (like us) vastly over estimate the amount of work involved. Even if you hire a contractor to do all the work, it’s still a ton of work for the homeowner to buy stuff and make decisions/changes etc. The more prepared you are and the more knowledge you have will allow you to be better organized in terms of having time to buy things properly – ie on sale. If you know that you need to have the tiles picked out by such&such date then you can… Read more »

JerichoHill
JerichoHill
13 years ago

This series will continue on for a few saturdays. I want to go in-depth about a few of the projects we did, and talk about how to find contractors who do good work in another installment

UPDATE on the project : We have passed all inspections! Insulation Monday

Kevin Baker
Kevin Baker
13 years ago

your individual contractors are not responsible for keeping the job site clean. That responsibility fails on the general contractor which in this case is you. Yes you could ask them to do it but as you said you’d be paying someone a ridiculous amount of money to sweep. I;m still back and forth on ikea cabinets. I’d say for the price they are decent. They will not stand up as long or be as nice as true hardwood cabinets though. (not the cheap ones with wood doors and funiture boards sides) I honestly wouldn’t recommend doing trim yourself. Yes the… Read more »

JerichoHill
JerichoHill
13 years ago

If you dont have a license, then you cant do something that needs a license to do, like electricity.

As for trim, its something I’ve done before many times. Yes, if you dont have a general skill level with it, itll take forever. But I once moonlighted as a carpenter =)

Hopefully there were some positive thoughts on the article =)

Kevin Baker
Kevin Baker
13 years ago

Not all states require licensing, and even a lot of the ones that do allow homeowners to do work in their own home. Also just because you’re supposed to have a license doesn’t stop people from doing it anyway. I can’t tell you the number of times people take a cheaper bid and then end up paying us more than we originally quoted to fix the work the cheaper guy did. As far as positive thoughts, I agree with most of the rest of your article. I love radiant heat, it provides a much more even heating for more comfort… Read more »

FourPillars
FourPillars
13 years ago

JH – great article in a fantastic series! Your idea of putting the ac in the attic is pretty cool. I did the electrical in my house (I live in Toronto, Can), it turned out to be a heck of a lot of work but it worked out pretty good. We had it inspected by the city so no worries about fires. Now if I could just get the lights to stop flickering all the time…. I agree with Kevin about the trim – I did the kitchen in my old house and it was an eye opener – I… Read more »

A.J. - IAmFacingMillions.com
A.J. - IAmFacingMillions.com
13 years ago

I didn’t exactly follow/understand the comment about buying the second lien???

Roy
Roy
13 years ago

Crown molding is easy. I only miter the outside corners and always cope the inner corners. Having a decent chop saw helps as well. Paint and caulk also hide a multitude of sins….why do you think George Washington painted his paneling? I also prime the back and cut surfaces as well. Anyone who does not prime the back side of exterior trim is not thinking long term. Also, houses not being plumb, straight, or square, is a given, even new construction where we tried our absolute best. Trees are like people, no one the same, and they change shape and… Read more »

anne
anne
13 years ago

Thanks for sharing your experience.

Radiant flooring is sooo nice! It’ll be great in your new addition! But, is it still under warranty if you install it yourself? Is it complicated to install?

JerichoHill
JerichoHill
13 years ago

Anne,

I will have a whole post on installing radiant floor heat yourself soon!

cindy@staged4more
13 years ago

Overall I think it’s a pretty great article. It’s very true that if the homeowners are willing to do a little bit of work themselves, they can save money in the long run. When contractors are on the job site, they just want to get everything done ASAP and leave. They don’t want to take time to clean up, etc and they will dump things in the bin without compacting them, therefore, more pulls and more gas to do so which is bad for the environment. By cleaning up the job site, you not only will allow people to work… Read more »

FourPillars
FourPillars
13 years ago

Another great post.

We found that buying materials too far in advance caused a lot of problems because of storage issues. Better to wait until it’s needed to get it.

Mike

Cathy
Cathy
13 years ago

“It’s also cost-advantageous to purchase everything for your contractors.” Are you sure? It seems like YMMV on this one. Contractors get discounts that the general public does not. Sure, contractors mark up the price of materials but then again, if you buy the materials for somebody they might mark up their hourly rate or bid rate to compensate. At the IKEA cabinet price range, you are probably correct that it is cheaper for you to purchase it. But lighting at Lowe’s – I think contractors don’t have to pay sales tax – so it may pay to have the contractor… Read more »

JerichoHill
JerichoHill
13 years ago

Cathy,

That’s right. I suppose I should mention that our situation is a little different in that we have an owner’s agent who is also a family member, so when I say we, I mean him… Or something.

Cathy
Cathy
13 years ago

Heh. Most people don’t have agents helping to orchestrate their home renovations. So you’re hiding the real money saving tip – marry into the construction industry and/or convince your relatives to go into construction. Wait 5-10 years so that your relatives can screw up other people’s houses on their dime and then let them go to town at low low rates on your house.

Full disclosure: my husband is a carpenter and he’s doing our renos. 🙂

Matt_In_TX
Matt_In_TX
13 years ago

Cathy has the correct strategy. Here is how NOT to do it 😉 DO’s and DON’TS for saving money on overseas remodeling My wife is a naturalized US citizen who still owns a small house in her native land overseas which we use for vacations every few years and as a dormatory for several college age nieces and nephews. Task: Remodel the house adding a new large second story bedroom onto the front of the house and ready the house for renting. These are true experiences my poor wife went through a couple of years ago overseeing this work. I… Read more »

Tim van Vonno
Tim van Vonno
4 years ago

This was an insightful read. I have to agree that any home addition project should be carefully planned so that you don’t end up getting overwhelmed with the expenses. Great article! 🙂

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