New equity loan keyed to home's renovations

Aberdeen credit union follows West Coast trend of projected higher value

May 02, 2004|By James Gallo | James Gallo,SUN STAFF

A new kind of home equity loan has emerged in Maryland that provides cash based on the future value of a house undergoing renovations.

The Aberdeen Proving Ground Federal Credit Union began offering a home equity renovation loan in March. The company, which has offices in Harford and Cecil counties, says it is the first lender in Maryland to offer such loans, which have been offered on the West Coast for about two years.

Americans spent $130.4 billion remodeling their homes last year, 7 percent more than in 2002, according to a study by the Joint Center for Housing Studies at Harvard University. The new loans are designed to capitalize on the growing tendency to renovate a house rather than move out, a credit union spokesman said.

Some mortgage lenders said they are concerned about the new loans because they could push homeowners into too much debt. Credit union officials with Aberdeen said they have put enough safeguards in place to protect themselves and homeowners.

"We appraise a home based on what the value is projected to be after renovations are complete," said Chris Eliopoulos, a spokesman for the lender. The credit union has not closed on any loans, but two homes are being appraised.

Eliopoulos said the loan is intended for homeowners who want to renovate their houses but don't have enough equity to qualify for a traditional loan. Interest rates are higher: Borrowers have a choice of a line of credit at a 4 percent variable rate or a 6.74 percent, 15-year fixed-rate loan.

During each phase of the renovation, an appraiser examines the construction to let the credit union know of the progress. Dominic Corson, a Bel Air appraiser hired by the credit union to study properties under consideration for the new loans, said those examinations should help reduce risk to the borrower and lender.

Still, said Doug Duncan, senior vice president and chief economist for the Mortgage Bankers Association, such loans can be risky if home values decline in a borrower's neighborhood.

"The appraisal really becomes more of a forecast," Duncan said.

Most appraisal experts said home renovations can add value to homes, depending on the type and level of work performed. Most say kitchen and bathroom upgrades generally provide the best investment return in terms of increasing the value of a house.

But many appraisers said most home values depend on current sales in the market, the neighborhood and the quality of the improvement.

Christopher Parr, a certified financial adviser with Financial Advantage in Columbia, said consumers should be wary of taking out too much debt on their home.

"I'm concerned with the current levels of consumer debt along with rising interest rates," Parr said. "I think the right thing to do may be to just back off - say, `We can't afford this today,' and wait until you build up enough equity in the home to get a traditional home equity loan."

Parr also recommends that consumers consider whether they can afford the loan if interest rates rise or if home values decline.

"It gives them access to more money, but it also creates higher debt," Parr said.

Trish Fluke of Perryville was one of the first to apply for Aberdeen's home equity renovation loan.

"We've been in our house for about a year now and wanted to renovate the basement," Fluke said.

Fluke said she first sought a traditional home equity loan. But there was not enough equity in her home to cover the cost of the renovations. That's when the family decided on the renovation loan, which offered them $24,000. The Flukes chose the 15-year loan at an interest rate of 6.74 percent.

"We're going to use the loan to put in recessed lighting, carpeting, and new walls, as well as to furnish it with a new couch and possibly a new TV," Fluke said. Future renovations may include a bathroom in the basement.

Fluke said she is comfortable with the loan since there are safeguards in place in terms of updated appraisals.

"It's a new thing, but we don't plan on moving and we really wanted to do these renovations," Fluke said.

Mike Nelson, vice president of residential lending with First Credit Union in Arizona, said home equity renovation loans have been popular at his institution since they began two years ago.

Nelson estimates that the company does 40 to 50 home equity renovation loans a year.

"I always encourage innovation," said Duncan of the mortgage bankers' group. "Of course there is going to be a risk, but these risks push ahead the market for customers.

"There may be a few kinks along the way, but on the good side, this could become yet another useful tool for consumers."

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