It’s no secret we’re in the midst of challenging economic times. Yet despite a national slowdown of residential renovation, locally there is still a strong demand for renovation and new construction. 

Phillip Camp, of Hawaii Architecture LLP, has noticed fewer large-scale projects overall, but sees smaller-scale remodels holding steady in his own business and throughout the Islands. Iris Yafuso, of Bank of Hawaii, echoes Camp’s observations, saying that, among local lending institutions, the demand for construction loans for new construction and renovation has even increased.

If you’re itching for a change at home, but are unsure if now is the time to buy or sell, you might want to consider renovating. Ultimately, when you do decide to move, your home will have added value—not to mention, you’ll be able to enjoy the perks of an updated space in the meantime. With many different financing options for remodeling, the home you’ve been imagining could be within much closer reach than you may think.

Here are some simple steps to getting started:

1. Find out how much you can borrow.

Any bank will tell you that loan preapproval is the first step. So, before even thinking about choosing a contractor or an architect, see a loan officer for preapproval to discuss the kinds of financing options that will be available to you for the project.

Pre-qualification, which is based on a cursory review of your finances, shouldn’t be confused with preapproval from a lender, which is a more in-depth look at your finances based on your actual income, debt and credit history. Preapproval will allow you to know exactly how much money the bank is willing to loan you. The percentage of that amount—which is typically the maximum—that you choose to borrow is completely up to you.

You do not have to take the entire amount you are approved for. Your loan representative can advise you on what percentage of the loan is realistic to take based on your lifestyle and other expenses you have.

2. Choose the right loan.

Once you know what kind of finances you are working with, narrow down your options. Some of the most popular loan options for home construction and remodeling today include: construction loans, home equity lines of credit and second mortgages.

The Construction Loan

Yafuso calls the construction loan an all-purpose finance option because it can be used for renovation projects, big or small.

“Construction loans can be helpful not only for homeowners who want to renovate, but for those looking to demolish their existing homes to rebuild new ones,” she says, including families who choose to renovate or rebuild to accommodate multigenerational living. “Many families who cannot afford to buy new, larger homes are now choosing to rebuild on the same property to fit the whole family,” Yafuso adds.

The two-in-one nature of Bank of Hawaii’s construction loan, for example, allows customers to make interest-only payments during the first 12 to 18 months while the renovation or new construction is taking place. After completion of the project, the loan is converted into a new loan with a conventional principal and interest payment phase. Bank of Hawaii’s construction loan offers 15- or 30-year fixed-rate terms.

“If you choose the 30-year loan, for example,” Yafuso says, “you might make interest-only payments for the first year and then begin to pay off the rest over the remaining term of 29 years.” Payments during the interest-only construction period are generally lower because you only pay interest on what is drawn.
Similarly, First Hawaiian Bank’s construction loan is a 30-year loan with interest-only payments during construction. Following completion of the project, the loan automatically converts to a fixed rate for the remaining years.

Derek Wong, of First Hawaiian Bank, recently completed his own construction loan from First Hawaiian Bank to demolish his previous home and build new on the same property. “During construction there are so many things to worry about—everything from working with the architect and the contractor to picking out flooring and appliances. It was assuring to know that the bank would take care of me on the financing end.”

Another added perk of construction loans is that portions of the loan are advanced as different phases of the project are completed to ensure that you’re not paying for the entire loan before the renovations are finished. For example, 20 percent of the loan may be advanced when the first step, such as the concrete foundation, is completed. Payments then continue in increments with each phase of the project. This feature protects you from making payments on an incomplete home in the event that unforeseen problems arise.

Home Equity Lines of Credit

A home equity line of credit is a good choice for more minor remodeling projects, and provides a solid source of funds for a variety of home improvements, such as bathroom or kitchen remodels or even landscaping. This is an increasingly popular option because home equity lines of credit allow you to simply write checks for various expenses at each phase of the project. As another perk, you don’t have to use the entire amount.

Instead, you use what you need as you need it. Home equity lines of credit function like credit cards (but with checks) and are secured with collateral—the equity you have in your home—making the rates and monthly payments lower. Closing costs are generally lower, too, and First Hawaiian Bank’s home equity line can be locked into a fixed rate for stable payments.
First Hawaiian Bank’s Equity FirstLine Plus home equity line of credit features an exclusive rate-lock option, which allows you to convert all or a portion of your balance into a fixed-rate loan, locking your rate as well as your monthly payments for the combined flexibility of a line of credit with the stability of a loan. A lower interest rate, lower monthly payments and the convenience of a home equity line of credit also protect you from rising interest rates.

Pearl Harbor Federal Credit Union’s Fixed Advance home equity line of credit features three fixed-rate options from which you can choose the term of the loan and fix the rate for that time. The customizable loan lets you decide if you want an annual or semiannual home equity line of credit, and then you choose either a three-, five-, seven- or 15-year term.

Second Mortgages

Second mortgages are another good option for remodeling. Yafuso suggests the second mortgage option for those with large amounts of equity in their home and small mortgage payments. A second mortgage wouldn’t replace the first mortgage, but would mean two different mortgage payments for the homeowner. With the newer mortgage, however, the terms of the loan are usually shorter.

Whether you’re considering a large or small remodeling project, architect Camp says that, ultimately, “What matters is what’s going on in your bank account, not what’s going on with the market. Whether [the economy] is slow or fantastic, you have to do your homework.” Camp suggests researching your options. With several financing options available, now is an ideal time to stay put and work on adding value to your home. Even if you’re unsure about selling your current home and buying a new one, you can be sure smart renovation choices are likely to increase your home’s value if you plan to sell in the future.