Home Additions: Managing and Financing Your Project

In the last section we discussed a step-by-step process of designing your addition. It’s quite possible, however, that you won’t want to draw up any plans beyond the very roughest sketches. In that case you would hire a design professional to work with you on developing your ideas of what you want and need in your addition, and ultimately to provide working drawings. In fact, you should be able to contract for any portion of the professional services, from advice about zoning laws to the full spectrum from concept to working drawings. In this section you will find descriptions of design professionals, the kinds of services they normally provide and a step-by-step guide to interviewing and selecting the individual or firm that will give you the results you want.

The owners of a Connecticut beach house attribute much of the success of their family room addition to the team of professionals with whom they worked “We had a fine architect who paid close attention to detail and a good contractor who earned our total trust,” they say.

Working with Design Professionals

Whoever does the work, your goals for your project will be the same. You want a design that suits your taste; is structurally suited to your house and lot; includes plans and specifications that are complete and correct; and can be built within your budget. Keeping these goals firmly in mind will help you in your selection of a design professional.

Architects. Architects are trained specifically for building design and engineering, and some offer consulting services for do-it-yourselfers. In order to be licensed in most states, an architect must complete five to eight years of architectural training, followed by a three-year apprentice ship, and then pass a state licensing exam. The American Institute of Architects (AIA) offers the designation A to architects who have met their standards for membership, which are of ten even more stringent than state licensing requirements. Membership in the AIA is voluntary, however, and its lack isn't a reflection on an architect’s competence.

The architect who specializes in adding on can offer you three important services.

+ Design services. After discussing your goals and needs for your addition, the architect will create several concept plans. He or she will show you sketches and floor plans to help you visualize the ideas and will revise these plans until you find a solution that satisfies your particular requirements. The architect will also help you to estimate costs and to make the design financially feasible. El Working plans and specifications.

Once the design is finalized, the architect can produce a set of finished plans and specifications for you to submit to the building department, contractors, and subcontractors.

Supervision. If you choose, the architect will supervise your entire project, including suggesting various contractors, sending the plans out for bids, and inspecting the progress of the work regularly.

Other types of professionals offer many of the same services as an architect. You may hire them for design, working drawings, supervision, or all three. The method of payment, either by fee or on an hourly basis, is also similar.

Building designers. The training of building designers is often similar to that of architects. In most states they must be licensed. The American Institute of Building Designers offers the AIBD designation to designers who have at least two years of architectural or building technology training, have worked six years under the supervision of a licensed designer, and have passed stringent testing. In many states, the services provided are very similar to those offered by architects.

Design/build contractors. Design/ build contractors accept full responsibility for a project from design through construction. The firm may employ architects or designers, or may subcontract for such services. These firms offer full legal responsibility and accountability from the beginning to the end of a project. Contractors must be licensed in most states. When considering a design/ build firm, make sure the professionals you will be working with have the specific design or construction expertise your project requires.

Draftsmen. The draftsman has the training and ability to take rough sketches of your ideas and draw up a complete set of working plans and specifications. He or she may offer limited design services, although these are primarily technical and not conceptual. The draftsman does not inspect or oversee construction.

Interior designers and decorators. Interior designers are concerned with such matters as traffic flow, lighting, and anything having to do with how the space is to be used. Interior decorators are concerned with fixtures and accessories, colors, types of window treatments, furnishings, and any thing else having to do with appearance. Either of these professionals may provide advice in conjunction with an architect or designer.

If you plan to use an interior designer or decorator, tell your architect at the beginning. They may be able to suggest someone with whom they have worked before. It is important for these professionals to communicate well and have respect for one another, as their decisions have to be coordinated and combined in the final design.

How to find a design professional

How do you go about locating the architect or building designer who will design the space that’s right for you, who will stay within your bud get, and who will inspire your continuing confidence? Listed below are several possible starting points:

- Ask friends. One of the best ways to find a professional you can trust is to ask friends, relatives, or neighbors to recommend people they have worked with.

- Use the Internet or Yellow Pages. Check online or the Yellow Pages and your local newspaper for advertisements. Architects rarely advertise, but they do use Internet pages or Yellow Page listings, which often mention their specialties.

- Consult trade associations. Call or email the local section of the American Institute of Architects, the National Association of Home Builders, and the American Institute of Building Designers for recommendations of people who work in your area and who specialize in the type of project you have in mind.

- Attend trade shows. The annual home shows and remodeling and decorating shows that are held in most communities are another good source. These events offer you the opportunity to meet and talk with professionals without having to make a commitment.

- Consult a profit-making referral service. These services recommend firms from among their subscribers. The referral costs you nothing; the subscriber pays for the leads received.

- Drive around. A less scientific but often rewarding method is to drive around the community looking for construction projects that are similar to what you want. Stop and ask who is doing the work. Most people will be glad to help, and pleased that you stopped.

- Visit home improvement centers and lumberyards. These stores often have a bulletin board for tradespeople to leave their business cards.

The first contact

When you have collected the names of several people or firms that may be able to do your work, you can make your first contact by phone, in order to narrow the list to two or three you will want to interview in person.

Take notes from each conversation so that your first reactions will be recorded and you will have an accurate account of who said what. The box at right gives a list of suggested questions to ask at this stage. In this initial contact you should provide a general idea of what you have in mind (a new second story, a new wing, etc.), some idea of your total budget, and when you would like the addition to be completed. No more detail than that should be required for your first contact. During this conversation you will be primarily looking for:

- Responsiveness. Did you get some one on the phone promptly who could give you the information you wanted?

- Respect. Were you treated with patience and courtesy?

- Availability. Does the firm do the kind of work you want? Can they do it in the time frame you require? Do they normally work in your area?

- References. Are they willing and able to give names and addresses of people for whom they have done jobs similar to the one you are planning?

Selecting design professionals

Questions to ask on the phone:

  • Are you interested in the addition project we have described?
  • Is our neighborhood within your normal work area?
  • Would you be able to handle the project within the time schedule we have outlined?
  • Are you licensed?
  • How long have you been licensed?
  • Have you been licensed under a different name? If you have been licensed under a different name, why did you change?
  • Will you provide trade, credit, and bank references?
  • Will you provide references from jobs that are similar in scope to what we are considering? (If so, get names, addresses, and telephone numbers.)
  • May we visit the job sites?
  • Do you handle the complete design phase?
  • Do you use a licensed architect, certified designer, or other for a project like this?
  • Were the jobs you referenced designed by the same person who would handle our project?

Questions to ask in an interview:

  • What information will you need from us, and how many times will we have to meet before a design is complete?
  • What assurance can you give us that your design will be within our budget?
  • What percentage of the projects designed by your firm actually get built?
  • Do you work with a schedule that shows target completion dates for each major phase of design?
  • Could you describe for us your basic design philosophy and how you will work to achieve a design that's pleasing to us?
  • What provisions does your design contract include? (For more information, see “What a design contract should include”)
  • Will you provide us with a sample of the contract you propose to use?
  • After the design is complete how do you proceed?
  • Will you assist with bidding or negotiation for a contractor?
  • How do you handle construction supervision?
  • How much responsibility do you take for the construction phase?
  • Does your firm help with financing arrangements?
  • What are your trade, credit, and bank references?

Questions to ask references:

  • Who specifically did the design work?
  • Who coordinated the project?
  • Who did the construction?
  • Were you happy with the project?
  • Was the designer responsive to your requests, creative in suggesting alternate approaches, and sensitive to your budget limitations?
  • How much variance was there between the preliminary cost estimate and the final cost?
  • What caused these gaps between estimates and final cost?
  • Did you experience any significant surprises that affected cost or schedule of the project?
  • Was construction completed on time and within budget?
  • Would you recommend that we consider using your designer for our project?
  • Do you have any suggestions that would help us work well with this person or firm?

Following up the first contact

References are extremely important. Be sure to check them; don’t just talk to them on the phone. and don’t settle for looking at pictures. The only way you can assess whether a firm is likely to perform the kind of work you want is to see something they have already done, and to talk with the people for whom they worked.

When you visit the references, be thorough in your inspection. Be mindful of such details as quality of workmanship, as well as the overall feeling of the place. Take along a notebook to record your on-the-spot impressions and the answers to specific questions you may have about the work.

Making your selection

After making calls and checking references, you should be able to narrow the field to two or three individuals or firms that impress you. These are the ones you want to meet with in person. Follow-up interviews may be conducted either at your home or at the professional’s office. Be prepared to provide as much information as possible about what you want to do. Bring your sketches, examples, product brochures, and so forth to the meeting. and be prepared as well to discuss your budget and plans for financing your project. There’s no point in withholding information; your ability to select someone depends partly on how they react to the information you provide.

In this interview, as well as answering the professional’s questions, be sure you also get the information you need. Al though the architect or designer will know more about how to build an addition than you do, don’t feel intimidated. It’s your home, and you’re the one who knows what you want in your addition.

Evaluating professionals

If you have followed the selection procedures outlined above, all of your candidates should be capable of producing the kind of work you want. Therefore, the one you like best, are most comfortable with, and trust the most is the proper choice. In making your evaluation, keep the following points in mind:

  • Ask yourself, does this person think the way I do? Do we share the same philosophy? Does this person like the same things I do? Will I be comfort able entrusting my home to this per son? Will I enjoy working with him or her? Can he or she be creative within my budget limitations? Can I trust this person to go to bat for me if things go wrong? Is he or she careful and thorough in all details?
  • Each professional you interview should prepare a proposal that spells out a specific course of action; the charges for specific tasks and the total estimated design cost; the time each phase will take; and at least a rough idea of the basic approach they have in mind, such as a new wing or a second story.

Once you make your selection, you will be ready to develop a con tract with the firm or individual.

Contracting for design

Regardless of the type of design professional you choose, you will be making two contracts: one for the design-to-construction phases and one for construction. Construction and construction management aren't covered in depth in this guide, but you will need to consider these when selecting a design professional.

If you choose an architect or building designer, you will probably want him or her to participate in the bid ding and negotiation with contractors and supervision of construction, unless you are sure you have the time and expertise to handle those formidable tasks. If you are working with a design/build firm they will of course supervise the construction, but you will still want separate con tracts for design and construction.

Every design contract should include certain key points. The box above discusses the items that any design contract should cover.

Most architects and designers will have a standard form contract. You aren't required to use this contract as written. Many contracts lean heavily toward “protection” clauses that state what will happen if some thing goes wrong, but are weak in clearly stating what work will be done, who will do it, when, and for how much money. and of course, that's the real purpose of a contract. You also want the contract to protect you, but contract clauses will not pre vent things from going wrong. Your best protection against problems is a clear understanding between you and the design professional of what will be done and who will do it. Your contract should define this under standing.

In all contractual matters it's best to consult an attorney. If you don't have one, find one who specializes in real estate matters and have the attorney review the document before you sign it.

The professional design process

The design phase is an evolutionary process in which you and the designer will be increasingly able to visualize an end result and make correct decisions. Here is a general out line of how a design project proceeds when the drawings are being done by a professional.

1. Analysis of existing site and structure. The first thing that happens is the development of a detailed drawing of your present house—the base plan that you drew up in Section 2. It identifies load-bearing walls, location of plumbing, electrical lines, and heating ducts, and any other structural items that might affect your addition plans. At this stage, the architect or designer should also inspect for underground obstructions or instabilities. If you already have blueprints or drawings of the original house, give them to the designer.

2. Review of legal restrictions. The next step is a thorough study of zoning and building permit regulations, easements, or restrictive covenants. The designer identifies any restrictions that may affect your plans.

3. General meeting. When the designer has gathered this information, you will meet to discuss the findings and to define more specifically every thing you want, the kinds of materials you like, how you plan to use the new space, furnishings you will include, and any restrictions that may alter your original thoughts.

At this point the designer will probably also discuss alternative courses of action. If you have been considering a second story, the designer may suggest a new wing. Be sure that your budget limitations are clearly understood, and that what you are discussing has a reasonable chance of being achieved.

4. Selection of a basic approach. After your discussion, the designer will provide some preliminary sketches of alternative approaches. These will be basic design drawings with very little in the way of specifications. Their purpose is to define space and design features. They may also include artistic concepts of appearance, particularly for the exterior. From these approaches you should be able to choose the one that will proceed to the preliminary design and cost estimate phase.

It is important that you and the designer remain as objective as possible throughout the design process. Be willing to listen to your designer’s suggestions, and be sure that he or she listens to you.

5. Preliminary design. The next phase of work may be the most critical part of your project. During this phase, the designer lays out the addition and how it will work with the existing structure in terms of traffic flow and so on, and prepares preliminary drawings in sufficient detail to get a meaningful cost estimate.

You will make final decisions on the design features you want to include, and on the exact dimensions of each room, and you will select materials and fixtures. You will also consider tradeoffs at this point. E.g., you may decide to put more money into your new kitchen and less into the new family room or guest bed room. These kinds of decisions often make it possible to get everything you want within your budget.

6. Preliminary cost estimate. De sign questions are dealt with in pieces, and only the cost estimate will reveal the sum of the parts. The preliminary cost estimate should be done by a contractor, who is generally more aware than architects and designers of actual building costs. Your architect or designer may select the contractor for this job, or you can have the estimate done by a contractor of your choice.

7. Final design. During this last phase you will adjust the budget and make decisions on all details. No major changes should be necessary after this; in fact, they should be avoided, since they become increasingly ex pensive as your project matures.

This is your last chance to be sure that you are properly visualizing the final result. You should ask for drawings, sketches, or three-dimensional models, if necessary, to be sure you understand what you are approving for construction.

8. Working drawings and specifications. As discussed in the previous section, the final product of the design phase is the working drawings. The designer will incorporate into the working drawings and written specifications all of the in formation needed by the contractor or whoever does the actual construction. These extremely detailed documents include specifications for materials and fixtures, where everything is to be located, how things are to be built, elevations of vertical surfaces, precise dimensions, finish details, and all other information required for ex act communication with the builder.

What a design contract should include

1. A statement that says who will review zoning and building codes and analyze the existing structure to define restrictions that may affect design, and when this will be done.

2. A clear list of the design phases, what work each phase will include, and the amount of time to be allocated to each 3. A definition of what concept drawings, models, and other visual materials will be provided.

4. A description of how a cost estimate based on the preliminary design will be obtained. This estimate should be provided by a con tractor and should be guaranteed based on the parameters defined.

5. A guarantee that the final design will meet codes and conform to zoning.

6. A description of what the specified construction documents (plans, products, and materials lists) will include. A statement that defines how the construction documents will be approved and accepted. (A review by the actual builder is a good way to catch any problems early on.)

7. A definition of what responsibility the design professional will take during the construction phase.

8. A clear definition of payment schedules. Design professionals generally work on an hourly rate. This hourly rate can be tied to design phases with estimated time allocations for each phase. You will need to define how additional charges will accrue if these time estimates are exceeded and how changes to the design will be handled if construction estimates are too high. You can put a ceiling on total design costs by including a “not to exceed” figure. This is commonly defined as 10 to 20 % of anticipated construction costs.

9. A clear delineation of who is responsible for what.

The Economics of Adding On

To determine whether it makes financial sense to add to your home, ask your se Could I sell the enlarged house for a price equal to its current market value plus the cost of the addition? Let s look at the parts of this equation.

Does adding on make economic sense?

If you’re looking at homes to purchase, the current market value is obvious — it’s the asking price of the home adjusted for any structural or other defects it may have. But if you’ve lived in your home for a number of years, you may not know exactly what its market value is. There are a couple of ways to find out.

Determining current market value

First, you can contact one or more real estate agents and ask them what they think your house might bring if you were to put it up for sale. Most will be happy to take a look at your home. Second, some professional appraisal services may be willing to provide information about recent appraisals in your neighborhood.

The key is to be sure the homes are comparable to yours in square foot age, number of bedrooms and bath rooms, size of lot, age, condition, and so on. Also determine the price range in your neighborhood, and find out why homes on the high end of the scale command their higher prices. Is it a matter of their size, location, architectural style, upkeep?

Calculating add-on costs

Once you have an idea of what you want—another bathroom, a family room, more bedrooms—it’s possible to come up with a ballpark figure for your addition even before you start your detailed planning.

Let’s say that you’re thinking about adding a master bedroom/bath combination to your two-bedroom home. The section on room-by-room planning can help you estimate the cost. Here you’ll find that the minimum size for a bedroom is about 70 square feet. Since you’re thinking about a master suite, with room for a king-size bed, lots of closets, space for a desk and maybe a love seat, and a built-in cabinet for the television and stereo, you’ll want to triple the figure, to 210 square feet. A 5- by 7-foot bath, the mini mum recommended, adds 35 square feet to the total. Now allow some room for a double sink and perhaps a bench and increase this to 50 square feet. Your addition is now 260 square feet. Remember, all you want is a rough idea of size.

What will a 260-square-foot addition cost? An addition is new construction, so you need to find out the per-square-foot cost of new construction in your area. You can call a few contractors, watch the newspapers for articles about construction costs in your area, or ask the company that insures your home for this information—they generally call it “replacement cost.” Your bank or savings and loan association might also be able to supply a figure.

Keep in mind that in a new home the cost of kitchen appliances and bathroom fixtures is averaged over the total square footage of the house. If you’re planning to add a new bath room or kitchen to an older house, the cost per square foot of your addition will be higher than the average new-construction cost because of the concentration of appliances or fixtures in the add-on.

Take the per-square-foot cost figure, multiply it by the square footage of your planned addition, and you have a rough idea of what your dream addition would cost if you hired someone else to build it.

Weighing the economics

Now add the cost of the addition to the current market value of your house and compare the total with the selling prices of homes in your neighborhood that are similar to your house with its planned addition. Is the figure in the ballpark?

An important economic rule of thumb is, don’t overdo it. If the market value of your home plus the cost of the addition is more than 20 per cent higher than the selling price of the best homes in your neighbor hood, the economics don’t look promising.

But the final decision involves more than mere dollars and cents. If you’ve owned your home for some time, you probably paid substantially less for it than its current market value. You’ve built up equity in it through both the mortgage payments you make each month and the effects of inflation on its value. If you plan to stay in your home for ten or twenty more years, you might decide that the pleasure an addition would bring you and your family more than out weighs the chance that you wouldn’t recover its entire cost if you sold the house. The same reasoning doesn’t make economic sense, however, if you might sell the house within the next few years or if you’re shopping for a house to add on to.

Add-ons that pay off

Social trends, family size, and fashion all affect the desirability of certain home features at a given time. Few home buyers today place much value on root cellars or servants’ quarters, although there were times when many homeowners considered each of these essential. The basement recreation room popular in the 1950s and 1 960s has given way to a space more in tune with today’s life-styles: the family room with plenty of light and proximity to the kitchen.

Certain features seem to retain their attractiveness over time, how ever. Despite smaller families, most buyers still prefer three-bedroom homes, so adding an extra bedroom to a two-bedroom house can make good economic sense. A fourth bed room may not increase the salability of a house as much, although the demand for home offices is strong in families where both spouses work. If a home has only one bathroom, addition of a second bath also will generally pay off. and a modern, roomy kitchen with up-to-date appliances boosts a home’s sales appeal as long as the kitchen isn't overdone.

Greenhouse and sunspace additions are currently in fashion and may continue to be so over the long run because of the energy benefits they can offer.

Bear in mind, however, that structural repairs or improvements—re placing a roof, repairing a shaky foundation—add little or no value to a home. (Failure to attend to maintenance will, however, reduce a home’s worth.) Keep in mind also that part of the cost of adding on may be for structural repairs or alterations to the original house.

Ultimately, of course, considerations other than economics will play a part in your decision. This is your house—the place where you spend much of your leisure time. You’ll probably decide to make it as pleas ant and efficient as you can afford to.

Can you afford your dream addition?

Adding on to a house generally involves a significant financial commitment. To see if your dream can become a reality, you need to assess your personal financial picture: your net worth and monthly cash flow. Getting all the figures together at the outset will encourage you to plan realistically, and it will simplify the loan application process if you decide to finance your addition.

Financing your addition Now that you’ve pinned down exactly what your addition will look like and have some idea of how much it will cost, the final step is to arrange for the money to build it.

The three basic options are using savings, converting investments or other assets to cash, and borrowing. If all these options are open to you, you may wish to consult your financial advisor for help in deciding among them. Among the factors you’ll need to take into account are the return you would forgo on savings or investments if you used them to pay for the addition; whether dipping into savings would reduce your financial safety cushion below what is prudent; and the tax advantages borrowing provides versus its cost.

Choosing a loan

This section outlines the loan options available to homeowners who decide to borrow the funds for an addition.

Personal loans. If you’ll need $5,000 or less to complete your addition, a personal loan can provide the funds. Also called credit card loans or line of credit loans, they generally carry much higher rates of interest and have shorter payback periods than loans secured by real estate. However, you can borrow smaller amounts than from a mortgage lender, and you may be able to draw funds only as you need them.

Private party loans—those arranged between individuals—are an other type of personal loan. If you have a relative or a friend who is willing to lend you money, this can be an excellent way to finance an addition. Since the parties to the loan set both the terms and the interest rate, this route can offer the lender a better return than he or she is now getting in the marketplace while at the same time providing the borrower with a lower interest rate than might be available through conventional sources.

Insurance or investment loans. Another way to finance a home addition is to borrow against the cash value of your life insurance policy or against the market value of stocks or bonds. (You can generally borrow up to 80 % of the market value of securities.) Because your policy or investments act as collateral, these loans are generally easy to get; and loans against insurance policies may carry favorable rates of interest and payback terms. Keep in mind, though, that borrowing against insurance reduces the amount beneficiaries would receive should anything happen to the insured during the term of the loan. and if the market value of your securities should fall, the lender could ask for immediate repayment of a portion of the loan.

Home equity loans. Although terminology differs among lenders, home equity loans, home improvement loans, and second mortgages are basically similar. The collateral for these loans is the equity (the difference between what your home is worth and what you owe on it) that you have built up in your home. They usually carry lower rates and longer repayment periods (5 to 15 years, depending on the size of the loan) than personal loans, but higher rates and shorter terms than regular mort gage loans.

The Federal Housing Administration (FHA) and the Veterans Administration (VA) back some loans of this type, which carry a slightly lower interest rate than do those through conventional sources. However, funding for such loans is limited, and processing times can be lengthy.

The U.S. Department of Housing and Urban Development (HUD) also backs low-interest loans, which are offered through local housing authorities. These loans are available to residents of targeted urban areas, who must also qualify on the basis of income. Check with your local housing authority if you believe your neighborhood might be included in this program.

Refinancing your mortgage. If you’ll need at least $20,000 to pay for your addition, it may pay to refinance the mortgage on your home—and at the same time increase its size.

If your home is now worth $75,000, for example, and you owe $30,000 on your original mortgage, the lender that holds that mortgage—or another lender—should he willing to issue a new mortgage for at least 80 % of the current value of your house, or $60,000. After paying off the $30,000 on the original mort gage, you would have $30,000 (less the costs of refinancing) to pay for your addition. Of course, you would also be facing higher monthly mort gage payments on a $60,000 loan.

Here are some of the positive points about refinancing:

- You’ll be able to spread the payments for your addition over the term of the new mortgage—at least 15 years, and often 30.

- You’ll make one payment a month rather than two.

Here are some of the negatives:

- You may have to exchange a low- interest-rate mortgage for one at a substantially higher rate.

- You will have to pay closing costs (which can amount to 4 or 5 % of the loan) and points (1 point equals 1 % of the loan amount) on the new mortgage, and you may incur a prepayment penalty (perhaps equal to 6 months’ interest) to retire your old mortgage early.

To help you decide whether it makes better sense to refinance your mortgage or to take out a separate loan to pay for an addition, call some lenders to determine their current interest rates and repayment terms and then calculate the costs under each scenario. The monthly loan payment table at right will give you the information you’ll need.

First calculate the monthly payment for a second mortgage at, say, 14 % over 10 years and add that to your current monthly payment. Compare that figure with the monthly payment on a larger mort gage at the current interest rate over a 30-year or other term. Then take into account refinancing costs (closing costs, points). Also calculate the tax benefits (higher interest deductions) that a refinanced mortgage will provide and compare them with the tax benefits of your current mortgage plus the second mortgage. Finally, remember that many fees included in closing costs will be the same no matter what the size of the mortgage; therefore, closing costs weigh more heavily the smaller the size of the refinanced mortgage.

Here’s a rule of thumb regarding refinancing in general: If the interest rate of the new mortgage is 2 percentage points lower than that of the present mortgage, and if you plan to own your home for three to five years longer, refinancing the outstanding mortgage (without adding to its size) should pay off.

When you shop for a new mort gage, you’ll find a variety of choices: fixed-rate loans, adjustable-rate mort gages (ARMs) with various indexes for determining when and how much the rate will change, and graduated- payment ARMs with lower initial payments but potential for negative amortization. You may be able to choose terms ranging from 15 to 30 years.

If you’re considering refinancing, it’s essential to do some informed shopping among lenders. Banks, savings and loans, and mortgage brokers are the three common sources of mortgage money. A bank or savings and loan may offer 25 or 30 different loan options, while a mortgage broker may have as many as 10,000 options. Check the number of points each lender will charge to grant the loan; lenders offering the lowest interest rates sometimes make up for this with higher points. and if you’re considering an ARM, determine whether it has a cap (a ceiling on how much the interest rate can rise) and calculate how high payments could go in a high-inflation economy.

Applying for your loan

Establishing your creditworthiness is a matter of showing the ability to pay back the money you are borrowing and having sufficient collateral to en sure repayment should something unforeseen happen. Each lender has its own criteria, but having all your financial information in hand should simplify the process.

When it’s time for the final loan application, you will probably need your final drawings in hand, and you may need a few hundred dollars in application fees. Some loans—personal or those against insurance or securities—may be had within a day or two of your application. Loans that use your real estate as collateral can take anywhere from one to six weeks in processing.

Calculating monthly loan payments

Find the interest rate and term of the loan you’re considering. Multiply the factor given in the table limes the number of thousands in the loan to determine the monthly payment. E.g., monthly payments on a $50,000 mortgage at 10.5 % for a 30-year term would he about $457: 9.147 x 50 = $457.35


Factor per $1,000; Term of loan (years)

Annual interest rate






































































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