Recently, nearly 80% of homeowners surveyed by Zillow.com felt that their home's value either remained the same or increased from 2007 to 2008. Despite the widely publicized downward trend in national home values, the majority of those surveyed were optimistic about their own properties.

 In addition, a substantial percentage of these homeowners expect to make significant improvements to their properties--over two thirds plan to make major home improvements during 2008. One third expects to cash in home equity by refinancing or taking out a second mortgage loan, and one third intends to sell their home during 2008. 

Home improvement is a prevailing theme. Property owners who want to stay put and ride out the latest downturn may want to live comfortably and possibly increase their home value at the same time.  As the survey was conducted before the last round of interest rate cuts, remodeling might now be an even more popular option than before.

Other homeowners who intend to sell their property in 2008 may plan renovations as well, knowing that in a soft real estate market it could pay to make their home stand out from the neighborhood competition.

Financing Home Improvements

When determining which kind of home equity financing is best for making home improvements, homeowners need to check into the following:

•  Amount of Home Equity: This is roughly estimated by taking the current value of the home minus the total amount of the mortgages against it. This ratio is also called loan to value, or LTV. In general the more equity borrowers have, the less expensive the financing. There are lines of credit and fixed rate home equity loans that allow LTV ratios of over 100%, but they are harder to get and cost more. Also, borrowers who have to sell their home could find it difficult if they owe more than they will receive in a sale.

• Terms of the Current Mortgage: Borrowers with an attractive first mortgage at a low rate can leave it alone.  A second mortgage can be positioned behind the existing first mortgage and doesn't affect the current mortgage at all. Second mortgages, whether fixed home equity loans or revolving home equity lines of credit (HELOCs), are therefore riskier for lenders, so they come with higher rates. Borrowers who want to replace their existing mortgage should make sure this choice doesn't carry a prepayment penalty, which could make the cost of refinancing prohibitive.  

•  Time Frame: Homeowners who don't like their existing first mortgage and who have sufficient equity might want to look into replacing their current mortgage with a bigger one--taking the difference in cash for home improvements.  Time frame is important because refinancing a first mortgage can be expensive, and it makes sense only if the borrower intends to keep the house long enough to recoup the cost of refinancing. Second mortgages, however, are relatively inexpensive to originate, often less than $500.

• The Nature of the Home Improvement Project: Those who need a large lump sum to pay a contractor could be best served by a fixed home equity loan. The entire amount of the loan is delivered at closing, and repayment begins right away. The fixed rate and payment make budgeting easier, and there is no risk of interest rates and payments increasing to the point of becoming unaffordable. Those doing a pay-as-you-go renovation may find that a flexible HELOC works best. The lender grants a line of credit, secured by the property, and the borrower can draw on it as needed. The credit line can be tapped and repaid repeatedly, and interest only accrues on the amount actually used.  In addition, HELOCs often offer the opportunity to switch to a fixed rate at one or more times during the term of the loan.

Property owners who sell or stay may benefit from remodeling their homes. Home equity or cash out refinancing can provide the needed funds to improve the comfort and value of their homes.

Sources:

CNNMoney.com