Loan, Sweet Loan: These days, banks have very low interest rates for home owners redoing a kitchen or adding a family room
published on January 11, 1994
in Skyway News
Is your avocado green kitchen looking ripe for change? Has your shrinking bathroom squeezed out the kids and the cat box? Are you having Metropolitan Home daydreams and Elle Dècor night sweats? Then it's probably time to remodel.
If you're like most folks, though, you think you've got to have money in one fist before you can start ripping out walls with the other.
Sure there's that new Visa and that overdraft protection on your checking account. But if the thought of paying those high interest rates— possibly as high as 21 percent— doesn't stop you, perhaps you should think again. With interest rates at banks hovering at 20-year lows, putting your home-improvement bill on plastic could be twice as expensive as it needs to be. Right now— according to Michael Nolan, director of public relations and special events at Norwest Bank in Minneapolis— interest on home-equity loans ranges from 7.75 percent to 9 percent for fixed rates and as low as 6.5 percent for variable rates.
But even with such low rates, many people still forego going for a bank loan, fearing they'll be rejected. "Don't tell yourself no before you come in and ask," said Sandy Jacobsen, vice president and bank manager at First Bank on Marquette in Minneapolis.
Although banks aren't throwing money into the wind, they're not as tightfisted as you might think, either.
"Across the board, the size and number of the home-equity loans has increased dramatically and steadily. Not only are the customers coming in for the money, the banks are lending it," said Jacobsen. Average secured home-equity loans range from $25,000 to $50,000. And many banks make home-equity loans for as little as $5,000.
People are spending the money, too.
According to first-quarter statistics for 1993 from the U.S. Census Bureau, Americans spent $39 billion to add or improve rooms in single-family homes. Midwesterners alone spent $13.5 billion to update their homes in 1992.
The average addition to a Twin Cities home starts at $35,000, according to John Sylvestre of Sylvestre Construction and former president and national representative for the Minnesota chapter of the National Association for Remodeling Industry. New kitchens range from $20,000 to $100,000, he said.
Where in the past the trend was to redo family rooms on the main floors of homes, today, Sylvestre said more people are opting to refinish their basements or add second stories as their kids get older.
How are people funding these pricey expansions? According to Jacobsen, most people these days prefer taking out a second mortgage over any other option at the bank to spruce up their homes because they can borrow over a longer term (up to 15 years at First Bank) and the interest may be tax deductible— "a significant cost savings for the customer," said Jacobsen. "It's a very reasonable way to borrow for home improvement."
The interest deduction is usually available for any loan that is secured by the borrower's home. A secured home-improvement loan not only helps you pound your home into shape, but also your IRS bill. In simple terms, the tax deduction would mean that if you paid $5,000 in interest on either a first or second mortgage, your taxes could be reduced by $1,000 to $1,500 depending on your tax bracket, according to Jacobsen. Your tax preparer should have more specific figures.
Low interest rates open up other options at the bank, too. Some consumers refinance their mortgages in order to cut monthly bills. For people considering home improvements, that's an ideal time to increase the mortgage and build the cost of remodeling right in.
There's also the option of getting an unsecured loan for smaller jobs, such as retiling a floor or adding a deck. But interest payments on unsecured loans won't clip the corners off the tax bill.
How much a consumer can borrow depends on the value of the home on paper. Lenders look at current tax statements or appraisals to determine what a house is worth, and most will loan up to 75 percent or 80 percent of that value. But even that rule is changing.
"First Bank is one of the few banks to be able to lend up to 100 percent of the value of the home," said Jacobsen. "That allows people to do a much larger home-improvement project."
Other deals include sesasonal "home-equity campaigns," in which banks offer loans without closing costs, which would save, for example, $180 on a $20,000 loan.
But consumers should be aware of hidden costs in what appear to be deals. "The consumer should just make sure that they know what they're paying for with the additional costs," said Nolan. The consumer should make sure that the bank clearly defines what those closing costs do and don't cover. For example, in what appears to be a loan with no front-end expenses, some banks might expect the borrower to pay for an appraisal.
While you might relish that $100,000 kitchen, enviable enough for Met Home, Sylvestre cautioned: "Don't expect a dollar-for-dollar return immediately. The investment builds in time, and its' rare when you won't get 100 percent return on your investment in time— except with swimming pools and extremely custom items."