The Modernize Glossary of Terms: Financing a Home Improvement Project

Welcome to the Modernize glossary of terms for anyone in the process of, or considering a home improvement project. It’s always advisable to discuss and check with your local contractor how various financing options and programs might affect your project but our guide is here to help familiarize you with some common terms you might encounter along the way. Bookmark this page and advise it whenever you are considering the next step of your project or signing paperwork that will inevitably include some of the terms below.

Modernize regularly updates this list so check back for new information.

Amortization

This term applies to the different allocation of loan repayment, wherein a portion of each mortgage payment, for example, pays partially for the comprehensive loan balance and partially pays for the accrued interest.

Annual Percentage Rate (APR)

When homeowners (or anyone, for that matters) finances a home improvement project (or anything, for that matter), the interest rate on their loan can be viewed in a yearly way, otherwise known as the annual percentage rate. A loan’s APR is a good measure by which to determine the cost of that loan over any given year but also over its entire lifetime. Homeowners can, therefore, calculate what it will mean to their budget to take out any given loan.

Cash-Out Refinance

Put simply, this type of refinancing replaces an existing mortgage with one worth more and the difference is immediately paid out in cash to the homeowner refinancing. Of course, then the homeowner owes than they did to begin with and carry the associated risks of increased debt. This type of refinancing requires built-up equity in a home before it can be used.

The Consumer Financial Protection Bureau

In its own language, the CFPB is a US government agency designed to “makes sure banks, lenders, and other financial companies treat you fairly.” From answering people’s questions about personal finance to acting as a repository for complaints about unsavory practices, the CFPB is a great resource for any homeowner considering financing anything, but especially when it comes to large-scale investments in long-term projects like home improvement. The agency was erected as a result of the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Learn more at consumerfinance.gov.

Closing Costs

Commonly known as settlement costs, these refer to the cost of securing a mortgage — closing the deal. According to finance site lendingtree.com, common items include

  • Title insurance
  • Escrow fees
  • Lender charges
  • Real estate commissions
  • Transfer taxes
  • Recording fees

Dodd-Frank Wall Street Reform and Consumer Protection Act

Commonly known as Dodd-Frank, this 2010 law is named after its original sponsors, Senator Christopher Dodd and US Representative Barney Frank. Largely aimed at banks, the law serves to protect consumers from predatory lending and financing programs. One result of the law was the creation of the Consumer Financial Protection Bureau.

ENERGY STAR Program

This volunteer-based resource from the Environmental Protection Agency is designed to help homeowners save money on home improvement projects, as well as other endeavors, that aid in protecting the climate.

Learn more at energystar.gov.

Escrow

When money is being handed off between two parties like a contractor and a homeowner, for example, or a buyer or seller, escrow is often utilized. It is a third party that is not part of the transaction and who is, therefore, able to hold on to security funds until the process of the transaction is complete.

Equity

Simply put, this is the calculated difference between what a homeowner owes on their home or property and the appraised (or market) value determined for it. The more of a loan a homeowner pays, the higher that homeowner’s equity in the given property.

Home Energy Renovation Opportunity (HERO) Program

Part of the Property Assessed Clean Energy (PACE) Model, the HERO Program provides financing for energy-efficient, water-efficient, and renewable energy products in California and Missouri. Local municipal governments collect annual property taxes to pay for the loan program.

Home Energy Score

This Department of Energy-developed program helps homeowners seeking to improve their property’s or home’s energy costs or efficiencies with “directly comparable and credible information about a home’s energy use.” In other words, the program can help a homeowner compare apples-to-apples the worthiness of a product or service as it regards that homeowner’s energy use.

Learn more at betterbuildingssolutioncenter.energy.gov

Home Equity Line of Credit

A home equity line of credit, otherwise known as a HELOC, allows homeowners to borrow money against their home’s equity. HELOCs are generally flexible but limited by a home’s value, and they also carry the risk of foreclosure.

Home Equity Loan

In contrast to a home equity line of credit (or a HELOC), this loan allows a homeowner to borrow money against the value of a home over the amount of any or all mortgages levied against the property. Since the home itself is the security for the loan, it can result in large amounts of borrowed assets. For all intents and purposes, a home equity loan is a kind of second mortgage.

HomeStyle Energy Program

This program from loan provider Fannie Mae lets borrowers get loans valued at up to 15% of their home’s appraised value to finance “energy-efficient upgrades when purchasing or refinancing a home,” according to the Department of Energy.

Property Assessed Clean Energy (PACE) Model

PACE programs are mechanisms by which private property owners (or homeowners) can more easily finance energy-efficient and renewable energy improvements on their property and using private sources of income. Local municipal governments collect annual property taxes to pay for the loan program.

Private Mortgage Insurance

Commonly known as PMI, this insurance protects a lender against a possible default by a borrower. Borrowers in many cases are forced to pay for PMI when a lender deems the given loan as risky enough to merit it.

Preapproval Or Pre-Qualification

Given basic information about a homeowner, for example, a lender might determine that person to be appropriate for a loan. No actual paperwork or fact-checking has been done but a bank, as an example of a lender, is tentatively interested in lending that homeowner money.

Residential Property Assessed Clean Energy (R-PACE) Model

As distinguished from the commercial PACE programs, these are designed specifically for residential homeowners, yielding different allowances and results.

Residential Renewable Energy Tax Credit

This financial assistance in the form of tax credit applies to up to 30 percent of a renewable energy installation, a solar paneling system, for example. It is important to note that this federal credit is for systems placed in service by Dec. 31, 2019.

Title I Property Improvement Loans

The federal government’s Department of Housing and Urban Development (HUD) helps insure private lenders against losses they might incur from loans they provide for property improvement. This insurance applies to “both large and small improvements,” according to HUD.

Learn more at hud.gov/program_offices/housing/sfh/title/ti_about.

The post The Modernize Glossary of Terms: Financing a Home Improvement Project appeared first on Modernize.

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These 11 Tips Will Help You Get Financing to Start a Small Business

For entrepreneurs, obtaining the right amount of funding can mean the difference between success and failure when launching a small business.

But for newbies, knowing how and where to find working capital can be an intimidating process. So, where do you start? There are several ways entrepreneurs can obtain money to fund the launch, expansion of day-to-day operations and cash flow of their small businesses.

Each method comes with its own pros and cons based on several factors, including the age of the business and the financial history of the borrower.

11 Ways to Obtain Small Business Funding

Below is a list of 11 ways entrepreneurs can obtain small-business financing. This ranking is based on ease of access, as some options might not be available to business owners with no prior experience or to people launching startups.

1. Bootstrapping

A woman counts money

With bootstrapping, entrepreneurs launch their businesses using as little external capital, such as loans, as possible. The funds come from either personal finances, such as selling assets, using savings or credit cards or from using revenue from the business once it gets going.

This is a very lean method of running a business, as entrepreneurs find the least expensive way to make a viable product or service. If you do choose to empty your savings or use credit cards to fund your business, be careful because there is no guarantee the business will pan out.

Nikki Larchar and her business partner, Tina Todd, bootstrapped their company by pooling their finances and launching the human resources consulting firm SimplyHR about 2 1/2 years ago. She believes bootstrapping her business instead of getting a loan is a significant reason why she was able to turn a profit within a year after launching.

“For us, it’s been monumental being able to grow the business how we want to grow it and not have a looming loan over our head,” she says.

Pro: Avoids starting your business in debt.
Con: Not an option if you don’t have assets to sell or personal savings to use.

2. Crowdfunding Platforms

Due to the rise in popularity of sites such as Indiegogo and Kickstarter, crowdfunding sites have become a more mainstream way to gain capital for a business, service or product.

Here’s how it works: Entrepreneurs and small business owners create a 30-day fundraising campaign seeking investors in the company or project instead of going to a bank for money.

Usually, business owners reward individual investors with some kind of gift, product discount or, sometimes, equity in the company.

Last year, Larchar used Kickstarter to raise $ 10,200 to fund a comic book that human resources departments could use to teach employees about sexual harassment policies. They met their goal and launched in January 2019.

“[W]e were able to fully jump into the project a lot quicker than we would have otherwise,” she says.

Pro: Can generate buzz for your business while raising funds.
Con: No guarantee of hitting your desired funding goal.   

3. Product Pre-Sales

An easy way to acquire funds if you’re operating a small business selling products is to hold a pre-sale in which customers pay for goods up-front. The business owner can use the money raised to fund the manufacturing of the initial batch of products.

“Product pre-sales is such a great strategy because you’ve just proven the customers want your product,” says Kedma Ough, the statewide innovation director for America’s Small Business Development Centers in Oregon.

Pro: Can help alleviate some of the upfront costs of making the products.
Con: Not a viable option for service-based businesses.

4. Friends and Family

Friends and family may be a potential source for financial capital for your small business, but be warned: If the business doesn’t make it or falls on hard times, it might destroy the personal relationship.

Ough says she’s witnessed many cases where family members stopped speaking to each other because they went into business and things went south. “It doesn’t mean it can’t work, but I’ve seen enough in my lifetime [that] it’ll break your heart,” she says.

Pro: Easily accessible.
Con: May ruin relationships if the business fails.

5. Partners

Two businessmen hold a meeting.

Taking on a business partner can be a way to secure funding in exchange for equity in your company. Depending on the arrangement, the partner might be an employee, someone not involved with day-to-day operations or just an investor.

If you are considering taking on a partner, write down every detail of the business partnership, preferably with the help of a lawyer. Define clear expectations and boundaries of what each partner can expect while running the business and worst-case scenarios of how the business would dissolve in the case of a partner dying or wanting to be bought out of the business.

“Make sure all that is dialed in before you go into partnership,” Ough says.
Pro: Can offer funding and business support without family connections.
Con: All partners need to have defined roles and expectations to avoid conflicts.

6. Small Business Grants

Small business grants come from a variety of sources, including government agencies, nonprofit and for-profit companies. Government agency grants tend to have the most narrow eligibility requirements, as they often focus on businesses in the science, technology or energy industries that will bring direct growth to the community.

Grants from nonprofits may focus on specific types of business owners, such as women, minorities or veterans. Grants from for-profit companies often have the widest eligibility requirements and may be given out based on merit or by completing an application.

Your local Chamber of Commerce may have information on small business grants available in your area. The only catch is everyone wants free money, so these grants can be hard to come by.

“[Government grants are] definitely not something that most small businesses are able to get funding through,” says Priyanka Prakash, a senior staff writer at Fundera. “But if you think you meet the requirements, definitely spend time putting the application materials together because if you win, you get free money and it’s an amazing way to start out.”

Pro: Who doesn’t love free money?
Con: Highly competitive.

7. Angel Investors

Just as the name suggests, the idea of having a wealthy investor come in and fund a startup can sound like the answer to an entrepreneur’s prayers. Angel investors can be affluent people or groups looking to fund startups.

P. Simon Mahler, a small business mentor with Score, a non-profit that advises small businesses, says people can search for angel investors by industry and by location — one such way is by browsing Angel Capital Association’s national directory of angel investors and firms.

Once you find a potential investor, it’s a long, thorough interview process with the entrepreneur and that person’s entire business team to make sure the business is viable.

“They’re very conservative, very selective as to who and why they invest in certain businesses,” Mahler says. “They want the sure thing.”

Pro: Having a benefactor can alleviate funding headaches.
Con: Can be a slow, difficult process to get the money.

8. Venture Capital

Similar to angel investors, venture capital firms also provide funding to small businesses and startups early on in development. The difference is the speed with which they operate and what they ask for in return. But that speed comes at a price.

Mahler says venture capital firms are very niche in what they invest in and are aggressive once they decide to invest. For example, angels may offer advice with their funding, while venture capitalists may ask for equity in your company and request specific changes in your business model.

“You’re giving away a lot to get a lot,” he says. “That’s what a lot of people struggle with is that it sounds good to have VC [venture capital] money, but you’re giving away a huge chunk of the ownership stake in your business.”

If you think your business may be of interest to such firms, start by asking your network for personal recommendations. You can also opt to make a profile for your business on AngelList — a national platform for job seekers, angel investors, entrepreneurs and venture capitalists alike.

Pro: May be quicker than using an angel investor to obtain large amounts of money.
Con: May have to give up a big piece of ownership stake to get the funds.

9. Online Alternative Lenders

Online alternative lenders have become a popular business financing option versus getting capital from traditional bank loans. Online alternative lending companies, such as Kabbage, OnDeck or BlueVine, are a convenient and fast way to get funds. There is no need to go to a bank to apply as everything is done online and funds can be deposited in a couple of business days.

Just like loans, online alternative lenders also offer business lines of credit, where instead of providing one lump sum of money up-front, you can use as much or as little as you need within your limit.

But the downside to using one of these lenders is that doing so can be an expensive way to borrow money. Prakash says the interest rate of a bank loan may be 7%-8% while these online lenders may charge up to 60%-70% in interests.

“It’s definitely a trade-off between how quickly or badly you need the capital versus how much you’re willing to pay for it,” she says.

Pros: Easy application process, faster way to get funds.
Con: High-interest rates.

10. SBA Loans

The U.S. Small Business Administration has a program to help business people get financing after they demonstrate success for a few years. SBA loans come with a guarantee that the loan will be repaid to the lender. If the business fails to pay back the loan, the government will pay the lender, which could be, for example, a traditional bank.

“It’s a way to take some of the risk off the lender, and it encourages banks to lend to more small businesses,” Prakash says.

The only catch is these loans are rather difficult to obtain for startups. “If your business is a couple of years old and generating good revenue and is close to a profit, then it’s a much more viable option for a small business loan,” she says. You can go to SBA.gov to find out if you qualify for an SBA loan.

Pro: Takes the pressure off the small business if the loan can’t be repaid.
Con: Not easy to get for startups.

11. Banks

Buildings with bank names are pictured

For entrepreneurs with not much experience under their belts, the most obvious place to obtain a business loan might not be the place to go.

Traditional banks want to make sure they’ll get their money back, so they’ll only work with what they’d consider a sure thing. This means unless you’ve been in business for a few years or have a track record of successfully starting small businesses, banks may not consider you for a loan.

Pro: Lower interest rates than online lenders.
Con: May not lend to newer businesses or startups.

What if You Have Bad Credit?

For people with a not-so-stellar credit score, there is still hope for launching a small business.

Funding options such as bootstrapping, loans from family and friends, crowdfunding and online alternative lenders might be the route you have to take because bank and SBA loans could be off the table initially.

You may have to pay more now, which is the case when using an alternative online lender with a high interest rate, but more affordable options may become available in the future.

Matt Reinstetle is a former staff writer at The Penny Hoarder. Adam Hardy contributed to this post.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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