By Paul Pagnato Private Wealth Advisor
Renovation design by Wiedemann Architects
Ask any recent visitor to the Chesapeake Bay what stands out about this area, and you are guaranteed to hear about the luxurious homes in the area. Owning a home in the Chesapeake is rewarding, whether it is a family home, retirement home, or vacation home. Chesapeake Bay real estate provides would-be buyers with a range of options, from quaint homes nestled in sleepy neighborhoods to manors overlooking the wavy bay.
When buying a home in the Chesapeake, remember to ask yourself how this purchase, whether it’s a primary residence, vacation home, or strategic investment, fits in with your long-term financial goals.
- How long do you think you’ll live in or own this home?
- How much can you afford, given other financial goals and obligations?
- How might changing interest rates impact your situation?
- Are you comfortable with fluctuating mortgage payments and
interest rates?
The decision to buy a home is just as important as what you decide to put into your home. Believe it or not, the choices you must make to furnish your home, including alterations, can have a long-term impact on its value. As the bay area grows in stature, houses are becoming more lavish and spectacular, yet too often buyers do not factor alterations to their homes into their budget.
So what fills these beautiful houses? While the exterior of the house draws attention, it is what is inside that makes your house a home. From marble countertops to steel fixtures, antiques and art collections, with the right financial tools at your fingertips, making your Chesapeake Bay area home as appealing and spectacular as the exterior is easier than you think.
Fix it Up to Raise the Value
While no real estate agent can promise you that a property will increase in value, buying in the bay area means you have already chosen a highly valued location, and making improvements to the home may increase its value over the years. As homeowners, you may be able to reap the benefits of that increase and grow your personal net worth when you sell your home.
A recent Harvard University study found that families that spend more on home remodeling, in turn, realize the greatest rates of price appreciation. The study “showed that some homeowners can recover as much as 80 to 90% of the cost of home improvements in the form of higher home values.”
For example, a client of mine decided he wanted to purchase a second vacation home. I helped them use their securities as collateral to purchase the home for about $1 million. Over the last year, they also used the equity in the home to make renovations and improvements to it, and now just one year later, it is worth double the value at $2 million, according to a local appraiser.
According to Nation’s Building News Online, spending at the higher end of the marketplace is also supporting growth. The number of households spending $25,000 or more annually on remodeling has doubled over the last 9 years from 16% in 1995 to 31.2% last year.
Home improvements accounted for $138.1 billion of remodeling activity last year, and $60 billion of that amount was spent on interior space additions and alterations, including upgrades for kitchens and baths.
There are several issues you should take into account before you decide to renovate your home. Ask yourself the following questions:
- How much money do you need to complete your project?
- How much equity do you have in your home?
- Do you need the money up front or can you draw on it as needed?
While most individuals understand the value home improvement can have on their home in the long run, most do not have an understanding of a means to finance such capital improvements. There are several lending options that you can consider to not only finance your home, but that also can be used for home improvements and furnishings. Be sure to talk to your financial advisor about how you can factor such costs into your overall financial plan.
Securities-Based Lending
There are various securities-based financing options available today that enable you to leverage your eligible securities. Such financing options can be a cost-effective source of funds, and often times enable the borrower to benefit from a lower interest rate than they would receive through unsecured forms of debt. In many cases, securities-based lending shouldn’t disrupt your investment strategy.
For example, there are loan accounts available that enable you to pledge a broad range of eligible assets as collateral, such as your managed assets accounts, exchange-traded funds, or even third-party assets. Pledging assets as collateral is advantageous because you borrow against rather than sell your assets, enabling you to keep your investment strategy on track. Additionally, the credit you receive is based on the combined value of all your eligible assets in the account(s) pledged, offering greater borrowing power.
It’s important to understand that securities-based lending involves some risk. If the market value of the pledged securities decreases, you may be required to deposit additional funds or to liquidate some or all of your assets without notice, leading to possible adverse tax consequences. Be sure to carefully review all risks and consult your advisors to better understand the tax implications associated with pledging securities as collateral.
Home Equity and Personal Lending
Your assets can be a powerful borrowing tool, providing you with ready access to financing when you need it most. Some traditional home equity loans offer adjustable rates with revolving lines of credit secured by the equity in your home. In some cases, you are able to make interest-only payments during the initial period, allowing you to lower your monthly payments. While paying only interest won’t reduce your principal balance, most interest-only loans allow payment toward principal at any time without penalty, giving you cash flow flexibility and control. In some cases, such loans are available with no upfront lender fees, no closing costs, competitive interest rates, and, in most cases, no minimum balance or draw (in most states). Also, interest on home equity loans is potentially tax-deductible, further reducing your after-tax cost. Consult your tax advisor regarding the deductibility of mortgage interest.
Remember, remodeling your home doesn’t have to deplete your cash or wreak havoc on your portfolio. There are cost-efficient ways to pay for improvements without “breaking the bank” or taking your financial portfolio off track. Using these financial tools in remodeling your home can help you make your Chesapeake home the dream home you have always wanted —on the inside and out.
Paul Pagnato is a First Vice President & Private Wealth Advisor for the Washington, DC District Merrill Lynch offices. He can be reached at (877) PAGNATO or paul_pagnatojr@ml.com.
Programs, options, and property types are not available in all states and are subject to change without notice. Loans are offered on properties in all 50 states, the District of Columbia, and the U.S. Virgin Islands. Additional terms, conditions, restrictions, and costs apply. Merrill Lynch, its affiliated entities, and their employees may receive compensation for its products and services.
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