Tuesday, November 18, 2008

Build your own Economic Stimulus Plan

Energy Improvement Mortgages can reduce the cost of ownership when you purchase a home, but what if you don’t plan on moving anytime soon? This month I take a look at some options for making home improvements that can increase the value of your current home while also increasing your monthly cash flow. (To learn more about energy efficiency mortgages, visit the EEM Homeowner Guide website)

Below are some possible options for financing improvements through “good debt.” For those of you unfamiliar with the concept of “good debt,” the rule of thumb is that debt is advantageous when it can increase cash flow and capital value. For example, a mortgage for a rental property would be considered good debt if the rent received covers the cost of the mortgage and maintenance costs.

What makes this ideal in our current economy is efficiency updates enable the creation of more green collar jobs. Ohio is aiming to be a leader in creating new energy related jobs and the incoming administration has made energy independence a stated goal within the next 10 years. So let’s get on the path to making this a reality!

Cash-out refinancing
  • For those with sufficient equity in their home to cover the cost of improvements this may be the best approach. When refinancing, check to make sure that the time to recover any related costs will occur within the time you expect to live in the home.
  • Energy Improvement Mortgages are also available for refinancing and use an energy audit to identify improvements that are cost-effective for the term of the loan.
Equity loans
  • In today’s current financing climate, cash-out refinancing is often the preferred approach. However, in some situations a line of credit or fixed home equity loan could be a good alternative. The downside on equity loans in this case is that the term is usually much shorter than a standard mortgage (e.g., 10 years vs. 30 years), and may limit the ability to make higher cost improvements that have a longer payback period.
Government and Institutional programs
  • If you live in Hamilton County, you may be able to take advantage of a couple of programs. The first is the Hamilton County Home Improvement Program (HIP) which provides for discounted loans over a 5-year term (knocking 3 percentage points of the standard loan rate). If making improvements that add value to the home, you should also determine if you can obtain a tax abatement for the increased value. More information about HIP can be found on the Hamilton county website.
  • The Home Weatherization Assistance Program is intended for individuals and families at or below 150% of the federal poverty guidelines. This program uses energy audits and other means to reduce utility costs. Visit the HWAP website for more details.
  • Other incentives may be available as tax credits or rebates. Particularly if you are implementing any renewable energy products (e.g., solar, wind, or geothermal). Check the database of state incentives at www.dsireusa.org.
Unsecured credit (i.e., personal loan or credit card)
  • Payment terms and interest on credit cards or unsecured loans don’t usually make for the best improvement financing. However, if you have the opportunity for a low interest, FIXED rate until the balance is paid (not an introductory rate that will adjust), then this could be a viable option.
Vendor financing
  • Some contractors and retail improvement stores may offer terms for the purchase and installation of improvements. Like the unsecured credit option above, if the vendor’s payments are less than you what you would save on your utilities, then it may make sense. Be sure to check that you aren’t paying a higher annual interest rate than what you can get through other financing though.
Cash from savings
  • For those with the financial resources, efficiency improvements may be a better investment alternative than stocks or bonds. See my August article “Where are you investing now?” for a discussion on the potential returns on energy updates.

As with any financial decision, it is always best to consult your financial advisor or tax professional to evaluate your particular situation. For more resources and information, contact me directly or visit my website at www.EcofficientLiving.com under the “Be Energy Smart” link. To learn about Energy Improvement Mortgages and other creative financing solutions that you may qualify for, Peter Underhill with Life Mortgage Group may be able to help. You can contact Peter directly at 513-771-5700 x305 or check my “References” page for additional resources.

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