Financing your home improvement project

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April 19, 2004 // UPDATED 1:17 pm - April 25, 2007
By: Bob Gilbert
Bob Gilbert

Banks, nonprofits, even the government are all eager to help

Home improvement loans are readily available for most homeowners for one important reason: the collateral most financial institutions require already exists in the equity of your house. Lenders are happy to dole out the cash for such a low-risk moneymaker. Plus, the city and nonprofit housing groups provide home improvement loans as a means of maintaining the housing stock and city tax base. Residents who want to fix up their homes now find themselves with more options than ever.

Bank loans

David Boyce, Senior Vice President of M&I Bank, based at 651 Nicollet Mall, said home improvement loans are part of the bank's core consumer lending portfolio. However, funds for home improvement projects usually come from home equity loans, M&I's top retail product.

A home improvement loan is basically a second mortgage -- a traditional, fixed-rate loan where funds are received upfront then paid back over five, 10 or 15 years. Typically, home equity lines of credit offer lower, but variable interest rates and more flexible terms. They work like a credit card, but instead of a limit based on income, it's based on equity, the difference between what you owe and what you've paid off on your home. The interest rates are based on the prime rate that is determined by the policy of the Federal Reserve.

M&I currently offers home equity lines of credit at around 4 percent. Boyce said they are also offering a closing costs-free home equity line of up to $100,000 at 2.99 percent for the first six months, that rate jumps to 4 percent or more, depending on fluctuations in the primary rate, thereafter.

Katrina Carlson, branch manager of Franklin National Bank, 2100 Blaisdell Ave. S., said most of the home improvement loans secured through her bank have been invested in the nearby Stevens Square and Whittier neighborhoods.

Franklin will lend up to 90 percent of the value of the property. For example, if a house is appraised at $100,000, the current mortgage and new loan can add up to no more than 90 percent of the value of the property or, in this case, $90,000.

Franklin Bank is currently making home improvement loans/second mortgages at 7 percent. Home equity credit lines are currently at 4 percent. Franklin adds one half to 1 percent to the variable rate depending on the equity in your home and market changes.

Credit unions

Brian Volkmann, senior real estate manager for Affinity Plus Federal Credit Union, which has a skyway-level branch office at 50 S. 6th St., said credit unions are similar to banks but can usually offer lower interest rates since they're not-for-profit, member-owned cooperatives.

"Credit Unions look at the whole picture of what the member is asking for, and not just what's on paper," said Volksmann. Affinity's membership consists primarily of State of Minnesota and University of Minnesota employees, however, membership is available to anyone for a one-time $25 donation.

Currently, Affinity is offering rates as low as 4.25 percent on home equity credit lines. To be eligible for that rate, the mortgaged amount has to be below 80 percent of the property's value. Although Volksmann added that they'll sometimes go up to 100 percent of the home's value, but then the rate goes up.

Volksmann said Affinity recently began offering a new "quick second mortgage," a five- to nine-year loan with a fixed 4.14 percent rate. Consumers are locked in at the low rate, but there's a $599 processing fee.

City Living

The city itself offers low-interest home improvement loans. Created by the cities of Minneapolis and St. Paul, City Living is primarily known for their mortgage loans (which are currently fixed at 4.85 percent interest). However, home improvement loans are also available.

Home improvement loans are available for up to $25,000 and are currently set at 5.25 percent. Eligible households must be at or below 80 percent of the Twin Cities median income or $43,442. City Living also offers a 0 percent, deferred loan of up to $20,000 for households at or below 30 percent median income or $16,290.

The city contracts with the Greater Metropolitan Housing Corporation to lend City Living home improvement loans.

Mark Anderson, who works with the city of Minneapolis department that oversees the program, said "Since [City Living] programs began in 1981, we have seen an increase in owner-occupied housing and the opportunity to do substantial rehab."

Nonprofits

Home improvement loans are also available from the Minnesota Housing Finance Agency (MHFA), a nonprofit that seeks to help low- and moderate-income people maintain their property. MHFA programs are delivered throughout the state by a variety of financial institutions and organizations, from banks to nonprofit developers to community organizations.

Through MHFA's flagship Fix Up Fund, households that earn less than $88,000 annually can borrow up to a $25,000, 20-year loan at 5.25 percent interest. The Fix Up fund is available to homeowners in neighborhoods all over the city.

MHFA's Rehabilitation Loan Program offers up to $15,000, interest-free, for families with an income below $18,000. Recipients have the option to either repay the loan in 30 years or when they sell the property.

One of the lead agencies that administers MHFA programs is the Center for Energy and Environment (CFEE), located at 211 N. 1st St. The organization gave out 1200 MHFA loans last year, all of which were traditional home improvement loans or second mortgages.

And for those who feel that there's still no way they could qualify for a home improvement loan -- Northside Neighborhood Housing Services of Minneapolis offers "sub-prime" loans for homeowners throughout the city and some suburbs. The loans are earmarked for individuals with a poor credit history or a high debt-to-income ratio or other issues that might prevent them from getting a conventional loan.