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.
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
|Most are Variable Rates|
Line of Credit
|Terms, Pay Scheds|
|Refinance||To get lower
|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!
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.
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.
- 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.
- 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.
- 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.