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By: Nicole L. Stuart, CTFA, Vice President
Mr. and Mrs. Parker owned a lovely home in an established neighborhood and wished to make a few improvements. Through the process of contacting the necessary tradespeople, they were approached with the opportunity to renovate their house as millions of Americans watched from the comfort of their own homes. In order to transform their existing home into their "dream" home on national television, they needed to find the right financing first.
The process began with an "as is" appraisal of their home, which means valuing the house based on its current condition and the recent sales of other homes in the area with similar attributes. The appraiser then looked at the blueprints of all the recommended improvements and determined an "as completed" value, which again took into account the recent sale of homes with similar characteristics in the area. Due to the significance of the improvements, special consideration was made to ensure that the home was not improved "beyond" the value of the neighborhood. This is generally taken into account when determining the final "as completed" appraisal value.
Once the "as completed" appraisal was finished, a determination of the maximum loan amount was made based upon the existing primary mortgages on the residence. Generally, guidelines provide for a loan-to-value (LTV) of 80%.
Upon determination of the amount of the credit request, the routine steps were taken. These steps included obtaining the property and flood searches and credit reports on the applicants. All individuals with ownership interest in the home must make joint application, and upon the filing of the mortgage, the financial institution must be named as "lender loss payee" on the homeowner's policy.
The Parker's searches and credit reports came back "clean" and after going through the standard credit approval process - including an analysis of their personal financial condition - the loan was approved and settlement was scheduled.
The Parker's used an Interest-Only Home Equity Line of credit to finance their renovations. This type of loan requires principal repayment at the borrower's discretion, with a floating interest rate based on the Wall Street Journal Prime Rate. This loan does not have expiration and remains available as long as the Parker's own their home in good standing. However, the Parker's do have the right to pay-off and close the loan at any time with no prepayment penalty.
This particular type of line of credit enabled the Parker's to meet their financing needs with a flexible, low cost, and tax deductible alternative.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.