Line Up The Money
One of the most challenging aspects of purchasing a fixer-upper is paying for the renovation. Understandably, most people don't have much extra cash after making the down payment and paying closing costs, so coming up with additional money to cover repairs or remodeling can be difficult.

For small projects, credit card debt is an option. Interest rates are high and the interest isn't tax deductible, but there are no up-front costs, such as appraisal and origination fees. It's also possible to borrow against the cash value in a 401(k) retirement plan, life insurance policy, or stock portfolio. In each of these cases, there's no credit check and the interest rates are relatively low — on par with that of a typical mortgage — but again, the interest is not tax deductible.

By far the most popular funding choice for a fixer-upper is a renovation loan, either through a home equity line of credit or a mortgage. Home equity lines can generally be borrowed against 90 percent of the equity that the homeowner will have in the house after the repairs and remodeling are completed. To illustrate: If a person buys a $250,000 fixer-upper with a down payment of $25,000, and the house will be worth $425,000 post-renovation, the homeowner will have $200,000 in equity. Even before the work is done, the borrower is eligible for a $180,000 home equity loan. The interest rate on a home equity loan is about the same as for a mortgage, but only up to about $100,000 in interest is tax deductible.

Even more advantageous is a renovation loan tied to the first mortgage. Similar to equity lines, these loans can be borrowed against the house's value after the work is finished, but like any mortgage, the interest is tax deductible up to $1 million. Renovation loans are offered by almost all mortgage lenders as well as through Fannie Mae's HomeStyle program and Freddie Mac's Home Works! product. For more information on financing your renovation, including details about loans insured by the Federal Housing Administration (FHA), see The Money Game.

From Nightmare to Dream House
In January 2001, Jesse and Marie Goff bought a 1,400-square-foot contemporary house with a water view in Sausalito, California, for $535,000 — about two-thirds of market value. The price was so low because the inspection found problems with the foundation, plumbing, and electrical system, and the house badly needed painting inside and out. The down payment exhausted most of the couple's budget, so they planned to first do cosmetic and design work — tear down walls to modernize the living space, put in a new kitchen, install wood flooring, and paint — before tackling the major structural tasks. "We decided to live there during the renovation and to save up money to do the big improvements like the foundation later on," Marie Goff says.

But many of the problems couldn't wait. A new kitchen, for instance, would have been damaged when they jacked up the house to do the foundation work later on. And not only were the pipes and fittings throughout the house in need of repair, but many weren't up to providing enough pressure to expand the supply network. As a result, months after the couple purchased the property, the walls and floors were still torn apart, the plumbing was turned off in parts of the house, the building was shored up pending foundation repair, and they had blown all the money earmarked for the initial cosmetic work. "That was depressing," Goff says. "We were living in the middle of what seemed like every problem imaginable."

Goff acknowledges that they made some mistakes. "We didn't calculate how much money we had, and how much we might need if things were worse than we thought and had to be dealt with sooner than we hoped." In the years since, they've managed to whittle away at the renovation — which still isn't completed — by scraping together the cash to do things right, taking on most of the work themselves, and hiring outside contractors only when necessary and working closely with them.

Despite the setbacks, Goff has no regrets. "It cost more than we expected and took much more of our time and work than we had anticipated," she says. "But when we're done, soon, this will be a house that we designed, in perfect shape, worth well over $1 million. And it's our dream house."
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