Imagining how people are going to enjoy the new comforts of home renovations after they have been approved for a HEL or Home Equity Loan can be very relaxing. Expanded living rooms, new game rooms, bigger bathtubs, or whatever property owners have been dreaming of can look like carefree times that they will soon enjoy.
Issues pop up, as they usually do with any construction projects, and some of these things are out of people’s control. But other possible issues can be dealt with before these things happen by thinking ahead of time before getting approved for a HEL or LOC (Line of Credit). Here are some things people do not want to overlook before thinking out these debentures for remodeling projects.
To find out more about LOCs, click here for details.
People should realize that they are paying high-interest rates (IRs)
A HEL is given to individuals in lump sums, and the IR is charged on the full amount from the start of the debenture – which are huge differences from a HELOC or Home Equity Line of Credit. Without going into the ins and outs of a Home Equity Line of Credit, it is worth noting that a HEL is paid at fixed interest rates that are about 2% more than HELOCs.
The repayments are fixed amounts for a certain number of years, usually twenty to thirty years, for a HEL that needs at least 10% equity in people’s houses. With how much money people take in advance with these types of loans, it is theirs to spend as they would like. They need to be innovative and put the fund aside in preparation for paying various contractors who will be doing their home renovations.
Check out contractors
Along with getting good referrals from family members, friends, co-workers, or neighbors, individuals should check out the contractor’s license with their state’s licensing organizations. Loan officers will most likely want to check out contractors they want to hire if they are taking out a HEL, though a Home Equity Line of Credit will not need as much attention. Individuals do not have to worry about anything if they take a HELOC out. They can even do the job themselves.
Individuals should check contractors’ insurance policies
After checking the contractor’s past jobs and referrals, and if they have been sued for shady or incomplete jobs, property owners need to make sure they have the right worker compensation and general liability policy. Minimum requirements vary from state to state, but homeowners should make sure it is enough to cover their home if it is destroyed, for instance, in a flood or accidental fire caused by the subcontractor or contractor.
According to construction experts, at least five hundred thousand dollars is a good starting point for GL coverage and one million dollars for workers comp insurance. During the first face-to-face meeting with contractors, property owners should ask that they have their insurance policy agent send them a copy of their policy certificates. That is a huge red flag if contractors do not abide by their requests. Homeowners do not want other people on their property who are not insured. In case workers fall down on their front step, they can sue the homeowner.
Avoid liens on the property
It may be one area that people think would be out of their control if subcontractors are not paid by the contractor and the sub-cons put liens against their property for nonpayment – even if they have paid the general contractor in full. But there are a couple of options if they think about them before the home renovation starts.
One option is to require contractors to secure payment bonds for sub-cons before the project begins. It is a form of insurance policy that contractors will not get back if it is not used and can add a thousand dollars or more to the renovation cost. Another excellent option is to ask contractors to set aside funds in escrow accounts to pay sub-cons, which should attract them to sign waivers to post liens.
This option is rarely used since the client’s checkbook is a type of escrow account that does not get paid out until job benchmarks are met. According to experts, they can give clients lien waivers that all sub-cons are paid in full at certain milestones and the end of the job.
Property owners can also request performance bonds, requiring the job to be satisfactorily completed according to contract terms. These bonds could increase the cost of the project by two to five percent, but the additional expense may be worth the property owner’s peace of mind, especially on bigger jobs.
Increase the property owners’ insurance
If the home renovations are expected to raise their home’s value by six to twelve percent, it is an excellent idea to check with their insurance firms to make sure their improved house is covered in a loss. A family’s policy agent can also determine if contractors have enough insurance policy to cover possible losses and if the property owner’s policy should be increased.
The wording in contracts with contractors may need to be added to make sure that their insurance policy is the main insurance and that they waive their right to file claims against the owner and their insurance policy. Whatever additional insurance they get, they should not wait until after the renovation to increase their coverage. For instance, houses can burn to the ground during construction jobs, and additional policies could help cover these losses.
Add a life insurance
Life insurance may be the last thing people will think about before they remodel their houses, but it is something they need to consider when adding to the value of av lån (of loans) and taking out a HEL. Adding more debts to people’s lives is an excellent reason to check their life insurance and review it to ensure they have enough coverage to pay that debenture if they die.
HELs and remodeling
Seeing that the property’s bathroom is falling apart or that the kitchen requires remodeling is easy enough to work out. Understanding and knowing the house improvement debenture options to pay for these jobs can be a lot harder or trickier. Two ways to finance these things are HELs, and HELOCs. Both things need to have some equity or value in the borrower’s house, usually at least ten percent.
In the end, people will get an improved kitchen, bathroom, bedroom, or other areas in the house that they can enjoy, and the property’s value may go up. However, not all repair and remodeling jobs pay for themselves by increasing their value. There are some values in updating properties for their own use. Here is the most basic option on how the LOC and debenture options work: HELOC.
Home Equity Line of Credit
It is one of the most popular choices for remodeling houses because the IRs are a lot lower compared to HELs and because the LOC can be used over ten years (draw periods), and IRs are only charged on the amount taken during that time.
These things can come in handy if people expect to take a couple of years to remodel their houses and are not sure how much money they will need. IRs change during the term of the HELOC, and it can change at intervals like every six months, annually, or quarterly. Current rates are about 5%, with a HEL rate of 2% higher.
The worst-case scenario for HELOC interest rates is about as high as credit cards – around 18% IR. After the ten-year draw period, individuals have twenty years to pay the entirety of the debenture, although they can refi the adjustable rate into a fixed-rate debenture. HELOCs are usually second liens positioned behind first mortgages. Depending on the person’s LTV or Loan-to-Value and credit score, these things are offered at the Prime Rate (currently at 3.25%).
