Historically low interest rates are drawing homeowners and business owners to lenders, either to refinance their loans to free up cash for improvements or to obtain lines of credit that can be used for renovations.
Aaron Buerge, market president for First National Bank in Springfield, said interest rates on refinancing are still hovering in the low 4 percent range, while rates for home equity lines of credit are about 6 percent.
Low interest rates convinced James River Assembly of God to refinance about $5 million while borrowing funds for a $14 million renovation and expansion project at its Wilson’s Creek campus.
Though the church was approached by some national lenders, leaders opted to keep the money local and refinance with 20-year amortization through Empire Bank, with which it already has an established relationship.
“Empire Bank is the bank we do business with, but we did get competitive rates,” said James River Assembly Chief Operating Officer Kert Parsley, who declined to disclose the interest rate on the church’s loan but has previously said it was competitive with the 4 percent range.
“We looked at rates and it was very encouraging,” he said. “We were out of room and needed the space.” The addition will include a 1,400-seat auditorium, a 450-seat youth building and early childhood and elementary age Sunday school classrooms.
Bob Berlin, senior vice president and chief lending officer with Empire Bank, said commercial remodels or additions are typically handled via an amortized first or second mortgage, rather than equity lines of credit that are more common with residential remodels.
“A commercial remodel typically involves an expansion,” Berlin said. “They are usually adding square feet, which will increase the value of the property.”
Berlin said commercial properties must undergo appraisals, which will include the expected value after the expansion.
OakStar Bank typically focuses on financing commercial renovations for owner-occupied properties, said Mike Lawson, chief lending officer.
“Many businesses qualify for typical bank financing,” he said. “If there’s an appraisal issue or loan-to-value issue, sometimes they can go through the (U.S. Small Business Administration.)”
Buerge said some business owners may choose to take out a line of credit against the fixtures in the business, or they may borrow against their homes or other assets if they don’t qualify for a conventional business or SBA loan.
While homeowners, too, can opt for a complete refinance and use available cash for renovations, many choose to tap into home equity to foot the bill.
With home equity lines of credit, homeowners typically have access to revolving funds they can use at their discretion.
Another way to secure a home equity loan is to have an amortized loan with a term to pay it off. Both types are secured as second mortgages, but the difference is how they’re repaid.
Lawson said the choice between a home equity line of credit or an amortized home equity loan depends on the individual borrower’s situation.
“A home equity line of credit may be good for someone who is self-employed and gets a big chunk of money several times a year,” Lawson said. “They can pay down the line when they receive that income.”
Both methods of using home equity generally require a loan-to-value ratio of 80 percent to 85 percent, and they typically require appraisals – which is where things may get tricky, Buerge said, citing the example of a home that appraised at $100,000 five years ago but may only have an appraised value of $80,000 today.
“Some banks will go higher than an 80 percent loan-to-value,” said Buerge. “We will typically go up to 80 percent, but we’re on a case-by-case basis.”
Bankers interviewed for this story cited anecdotal evidence of steady to increasing refinancing volumes but declined to disclose actual figures.
Homeowners also may choose to borrow against other assets – a clear car title, certificates of deposit or savings accounts – to pay for remodeling, Buerge said, noting that the interest rates on loans against CDs and savings accounts would typically be 2.5 percent to 3 percent higher than what the accounts are earning.
Homeowners should think carefully about borrowing against their vehicles, Berlin said.
“The problem with those loans is the tax deductibility,” he said, nothing that many mortgage loans have tax benefits.
“Car loans are also three to five years and people making a big investment would typically want a longer loan,” Berlin added.
Most homeowners don’t use their cash reserves for renovations if they don’t have to, Berlin said.[[In-content Ad]]
