By Richard Day, Renovation/EEM Mortgage Officer
Spending on home improvements and repairs has consistently increased over the last several years, and that trend is expected to continue according to information from the Remodeling Futures Program of the Joint Center for Housing Studies, at Harvard University. After strong growth up to 2008, with low financing costs and strong house values encouraging upper-end remodeling projects, the trend now is more focused on lowering utility costs and helping the environment, while stabilizing homes systems and overall condition for improved longevity.
In the current real estate market many owners are now planning to stay in their homes longer. With that in mind, buyers renovating are changing the makeup of home improvement projects. Recent buyers tend to focus on updating kitchens and bathrooms, while established owners do projects to maintain the condition and economic life of a house.
With the majority of U.S. homes now at least 35 years old, there is demand for mortgage products that address the needs of older houses that need system updates and improvements, but also some desired cosmetic projects, like new tile or cabinetry.
Renovation loans give owner occupants (whether buying or refinancing) options when it comes to fixing a house that isn't perfect. Owners have choices developed specifically to help them finance a home improvement project. The Federal Housing Administration’s (FHA) 203K Program (Standard and Streamline) is one of the more popular renovation loans. It is generally used to update or improve a house or condominium needing essential repairs such as new wiring, plumbing, roof repair or replacement, structural repairs, and so on.
Other renovation loan programs such as Fannie Mae’s HomeStyle, give similar options to owner occupants, second home buyers, and investors. In addition to essential repairs, these loan programs sometimes allow financing for luxury items such as swimming pools, hot tubs, sun rooms and tennis courts.
These mortgage products are great tools for homeowners and important for community revitalization, as well helping salvage the glut of foreclosed housing. Investing in a home contributes to the financial well-being of the owners, and it certainly contributes to the financial well-being of a community because the owners are preventing these older homes from deteriorating and dropping in value.
When people think about home renovation they often think about the basics, such as a new kitchen, adding a bathroom, upgrading interior surfaces such as walls and floors, and pretty much stay focused on the existing structure, with no regard for the envelope or other aspects of energy usage. It is important to know that in addition to those basics, renovation loans allow borrowers to:
- Do additions
- Add second floors
- Finish basements
- Change units (EX: 6 unit to a 4 unit, 1 unit to a 2 unit, etc…)
- Move a house from one location to another
- Address handicap needs, including installation of an elevator
- Finance and renovate a mixed use building
- And so much more
Rising energy costs have also put energy efficiency improvements at the top of the list for many homeowners. The end result of an energy-efficient house is that it also provides the highest level of comfort available, increases the value of the home, and makes it quieter (unless the windows are open as the weather allows), all while lowering the operating costs of the structure. When one considers the utility savings, often times it is less expensive over the long-term for a homeowner to go with an energy-efficient remodeling project, while also completing all other necessary or desired repairs and renovations.
A very important thing to remember is: Taking advantage of installing energy efficient retrofits during other renovations simultaneously can save money on the installation costs. Consider the cost of updating the plumbing in a home. While walls are open, if you discover that there is no insulation on an exterior wall, address that issue now rather than opening the wall again months or years down the road. There are dozens of examples like this that homeowners ignore every day.
THE STEPS TO GET MORE EFFICIENT
Whether under contract to purchase a home (regardless of occupancy), or planning a refinance of a home, the first step is always the same. GET A RATING/AUDIT! Of course a current homeowner can do this anytime, the sooner the better, and the sooner the savings. As they say, the first step to the cure is recognizing the disease. It only makes sense to figure out what the structures needs are, and the best way to do so, is to get an energy rating. These come in few forms, but one of the most common methods is utilizing a blower door test and a HERS (home energy rating service) rating.
A HERS rating will identify where a house leaks. Air leaks that is; areas of the home that experience high levels of air exchange from the inside of the home to the outside, and vice versa. Once the leaks are identified, then solutions can be employed to stop those leaks, and prevent the homeowner from heating and cooling more than is really necessary to make the home comfortable. Another benefit to stopping leaks is reducing moisture in the home, which can help make the home healthier for its occupants. There are many ways and materials available to tighten the envelope of a home, including:
- Insulation: foam, cellulose, fiberglass, etc…
- Weather stripping
- Caulking
- Energy efficient plants: heating/cooling (HVAC), hot water heater
- Lighting (including types of bulbs)
- Appliances
- Solar
- Geothermal heating, cooling and hot water
- Windows: repairing, replacing, storm
- Doors (exterior)
- Controls: Computerized thermostats, timed lighting, water flow (including toilets)
Paying for the cost of energy efficient retrofits to a home can be challenging, but understand that there a few programs out there, including:
- Paying cash
- FHA EEM (Energy Efficiency Mortgage)
- VA EEM
- FHA 203K Renovation (Good option if energy costs exceed program limits)
- HomeStyle Renovation
- Powersaver Loan (government program)
- Personal loan (if modest amount, this is not a bad option)
- Credit card (if modest amount, this is not a bad option, if can pay off quickly)
- Grants (check availability in locale, both government and non-profit)
Note that it is often the case the any payments for borrowed funds can be covered by the monthly savings in lower utility bills.
The main thing that homeowners need to remember is that renovation and energy retrofits should go hand in hand, or if the house is in overall good condition, then just focus on investigating what can be done to make it more energy efficient. If the home is already owned, then do an analysis of what all the needs are to make the home energy efficient as well as improve quality of life. If purchasing a home, get a rating, while doing a home inspection. The more known about not only the condition of the home, but also its energy usage, the more can be done to tighten the structure, lower the operating costs of the home, save money, and help the environment, all while in the process of the purchase.
For many homeowners, the money needed to install energy retrofits, and/or renovations may not be available, so building it into the mortgage may be the perfect plan to accomplish all goals at once. Finally, if a buyer is interested in a home that is in distress, it is often the case that a regular mortgage will not work as the home will not pass an “as-is” appraisal in its current condition. An EEM, a renovation mortgage, or both, could be the perfect solution to a homebuyers needs to acquire and cure all the homes renovation and energy needs at once, as these programs all do the same thing…they appraise the home in its future renovated condition, thus giving the buyer credit for value that doesn’t yet exist.
