Home-remodeling financing: consider the options

How to finance a home-remodeling project? It's not hard these days, but it's expensive. You have a number of options, lenders say.

The type of financing that's best for you may not be the right route for your neighbor. Simply, whatever you do should be tailored specifically to your own needs and at the best rate around that you can find.

The most obvious vehicle is a Federal Housing Administration (FHA) Title I loan, a government-insured program with a maximum term of 15 years at 17 percent.

FHA Title I loans are made by a local bank, savings and loan association, or other type of lending institution, but the federal government stands behind it. The amount of money you can borrow depends on the number of units to be improved. On a single- or two-family house the limit is $15,000. Then from three to five units, the limit if $7,500 per unit for a maximum of $37,500 for the five units.

Most banks do not require that you have a first mortgage with them to get the money. In effect, it is a separate unsecured personal loan that is FHA-guaranteed to the bank.

A lot of banks have their own home-improvement programs, which are basically no different from a personal loan except that a bank, for the most part, will have its own private insurance to take the place of the FHA guarantee. The rates will exceed the FHA rate and probably range between 17.25 percent and 18.5 percent, depending on the area of the country and how much money the lender has in its vaults.

"It's up to the discretion of the bank," says one banker who points out that FHA Title I rates have gone from 13 to 17 percent in the past few weeks.

You can always borrow money on your life-insurance policy, of course.

If you live in a big city that is trying to upgrade its neighborhoods, you might be able to get a special type of low-rate loan, depending on your financial situation and what you want to do to the building.

At least a half dozen banks in Boston, in cooperation with the FHA, are participating in the City of Boston Interest-Reduction Home-Improvement Program, part of a grant from the federal government. Only designated areas of the city are included, but it's one of the best deals around. Too, the money is only available for improvements that are structurally warranted.

You can't get an interest-reduction loan for a swimming pool, for instance.

Other US cities have similar programs to help upgrade the neighborhoods.

Another way is to tap the increasing equity you have in your home by taking out a second mortgage.

With inflation running rampant, the market value of housing is going up steadily. Thus, you probably have a sizable nest egg in you home which represent substantial borrowing power.

Second-mortgage rates in Boston are about 18 percent across the board and even higher in some parts of the country. Most banks will lend up to 80 percent of the appraised market value between the first and second mortgage. A 5- or 10 -year equity loan may cost less overall than refinancing a lower-rate first-mortgage loan that still has many years to run.

Anyone planning to borrow against his unrealized home equity should shop very carefully for the best financial deal, the General Electric Credit Corporation warns.

"Refinancing the primary home mortgage would be, I think, the last resort in many cases," in the opinion of one banker.

Many banks have a discount rate of some sort for an energy type of loan. Also, many states have special incentive programs to encourage more people to insulate their homes, install solar heat, and otherwise enhance the energy-saving potential of their property.

Call a few banks and find out if the type of improvement you want to do will qualify for a lower rate. The saving may be only one-half to 1 percent off the going rate, but it all helps out.

(Don't forget that home-energy improvements can reduce the federal income tax by 15 percent of their cost. "In other words, a taxpayer benefits from the full amount of the 15 percent credit given for insulation and other energy-saving home improvements," Sheldon H. Cady, executive vice-president of the Mineral Insulation Manufacturers Association, notes.

(For example, if you spend $1,000 for attic floor insulation and storm windows, you can take 15 percent of $1,000, or $150, off your income tax. The tax credit, which became effective last year, will continue to the end of 1985.

(Renters as well as owners qualify for the credit. The house must be the taxpaper's main home and it must have been built before April 20, 1977. Summer and vacation homes do not qualify).

Finally, you may be able to tap the reserves of a rich relative.

"The rates today are absolutely atrocious," one lender comments. But he notes that investors are picking up 15 percent and more on six-month savings certificates.

"It's fine when you come in with the money, but when you come in looking for it, it's another story," he concludes.