Can anyone suggest the most efficient way to borrow against my property to remodel it?

My house is mortgage free but needs a major overhaul to the tune of $400,000. I can take out a first mortgage on it at 6.625% which will cost about $2500 a month. The question is where to put the cash to get the best interest on it while paying the contractor over eighteen months. Layered CDs perhaps?

With anticipatory thanks.

Just get a HELOC. You can do it to the tune of 80% LTV with no problems. That way you only need to pay out as you need it. After it's all done, you can (if necessary) refi it into a fixed rate loan.

joe

Four hundred grand? Man, what's the house worth? Maybe you'd be better off to bulldoze it and take out a construction loan instead.

Four hundred grand? Man, what's the house worth? Maybe you'd be better off to bulldoze it and take out a construction loan instead.


Can't do - it's in an historic district.

The question is where to put the cash to get the best interest on it while paying the contractor over eighteen months. Layered CDs perhaps?

I'd think something like ING would be good. I think they're paying about 5% right now for a straight savings account. No hassles with CDs and hoping you get them coming due at the right time.

You might want to run the numbers to see if the bit of net interest expense on the unused funds is more or less than the somewhat higher interest rate on a HELOC, but not having to pay interest until you actually need the funds. My guess is that parking the unused money is cheaper, especially if things drag on later in the project - as remodeling projected tend to do.

You didn't ask, but I'll also suggest having a 10% cushion for cost overruns that your contractor knows about. Then keep another 10% - 15% on top of that, but don't tell your contractor about that cushion. From the stories I've heard, the cost overruns will come to whatever funds the contractor knows you have. Once they think you're running out of money, they finally get the idea that they need to watch the budget.

So decide what funds you have available for the remodel, subtract 15% for your secret cost overrun cushion, and subtract another 10% for the known overrun cushion. So your actual initial construction budget would be about 75% of the funds you actually have available.

--Peter

Thank you, Peter. You're confirming what I thought might be possible and the tips are very useful too.

You didn't ask, but I'll also suggest having a 10% cushion for cost overruns that your contractor knows about. Then keep another 10% - 15% on top of that, but don't tell your contractor about that cushion. From the stories I've heard, the cost overruns will come to whatever funds the contractor knows you have. Once they think you're running out of money, they finally get the idea that they need to watch the budget.

Amen.

Having just completed three remodels (well, the third is almost done), I can tell you that you MUST keep control of costs, and only YOU can do that. Get a firm contract, complete with SKUs for the materials used, a timeline--make the contractor pay YOU if he runs over--and use change order forms for even the smallest deviation from the plans.

http://www.thecontractorsgroup.com/form-change-order.htm

http://www.thecontractorsgroup.com/forms_pdf/chod-001bp.pdf

Also, buy this book. It's chockfull of good suggestions on how to get quality work from your contractor and his subs. The chapters about working with contractors are the best I've ever read.

www.flipthebook.com