December 9th, 2019 9:03 AM by Jackie A. Graves, President
If you’re considering a home remodeling project, you’re probably
thinking about borrowing money, as this work can be quite costly.
Here we will cover all the ways to pay for home renovations to
help you find the smartest, cost-effective options for your particular
When should you consider a home renovation loan?
Simply put, this type of loan is for people who don’t have the
cash to finance the project they have in mind. This could be everything from a
new roof or furnace to a kitchen or even an addition to the home.
considering renovations, bear in mind that the total cost will probably involve
much more than just labor and materials. Often, this figure includes fees for
architectural and engineering services, inspections and permits, and potentially
having to put up a contingency reserve of 10 percent.
types of loans are available, most of them contingent on how much equity you
have built up in your home. Whatever your project, there’s probably a mortgage or personal loan right for you.
MINIMUM CREDIT SCORE
MINIMUM DOWN PAYMENT/EQUITY REQUIRED
Mae HomeStyle loan
equity loan / HELOC
comes down to credit and eligibility,” says Gregg Harris, president of
LenderCity Home Loans, a division of BBMC/Bridgeview Bank Group.
example, an FHA 203(k) might be best for a borrower with so-so credit and
little money to put down since borrowers can get a mortgage with only 3.5
how much you want to borrow and what it is you want to change. It can be hard
to identify the best home renovation mortgage for your needs, so work with a
lender who has extensive knowledge of the different loans, advises Laurie
Souza, national business development manager at Mortgage Network Inc. in the
you’re working with a lender that is well-versed with the details of the
program,” she says.
whether to seek a loan, one financial issue is whether–and if so, how much–the
renovations would increase the home’s value. Some projects may increase the
value beyond their cost. But with others, you may not get back the cost of remodeling
when you sell; some projects simply aren’t worth doing from a cost standpoint,
although you may want to do them anyway because it improves your lifestyle.
Think: Adding that in-law suite or extra bedroom.
weighing renovations from a return standpoint, it’s a good idea to pay
attention to the total amount you’d have in the home after finishing the work,
relative to an appraiser’s estimate of the total after-project value.
want to consider the values of comparable homes in the neighborhood that have
sold recently. A major pitfall lies in investing more in a home, through the
purchase price and remodeling, than the values of these comparable homes, as
they’ll affect your eventual sale price.
depends on which type of financing you choose. With a cash-out refinance of your mortgage, you can expect
to pay about 3 percent to 6 percent of the new loan amount for closing costs. A
personal loan may have no fees but much higher interest. Closing costs for HELs
and HELOCs are typically low and might include an application fee and or
appraisal fee that together would be less than $500.
the major cost is interest paid on the loan, which might stretch over 20 or
more years with some of these options. A $50,000 loan at 6 percent interest
will cost nearly $86,000 to repay by the time the last check is written.
detailed information on financing available for renovations:
One of the
best-known loans for home improvements, Fannie Mae’s HomeStyle Renovation Loan, allows borrowers
to either buy a place that needs repairs or refinance their existing home loan
to pay for improvements.
loans are available from any Fannie Mae-approved lender, but there are
advantage of a HomeStyle loan is that it’s just one loan, you don’t have to
take out a loan for the mortgage and then another loan for home repairs.
Getting just one loan reduces paperwork and closing costs.
mind that the money goes into a separate escrow account that’s used to pay
contractors directly. You don’t have access to those funds as you do with
a home equity loan or a cash-out refinance.
with the HomeStyle loan is that there’s a little less freedom for the customer
because the funds are held in an escrow account,” says Eric Wilson, director of
operations at Better Mortgage.
Housing Administration offers a home renovation loan called a 203(k). There’s
typically a lower credit-score requirement for this loan than there is for a
HomeStyle loan, and a lower minimum down payment–3.5 percent.
two types of FHA 203(k) loans:
FHA 203(k) loan is designed for cosmetic improvements and is capped at $35,000.
This rehab loan can be used to finance repairs and improvements like a kitchen
remodeling or a new paint job.
FHA 203(k) loan can be used for extensive remodeling, but it requires you to
hire a qualified 203(k) consultant to oversee every step of the work, from the
plans to the finished product.
of home renovation loan is available for homes that are at least a year old.
The rehab project must have a cost of at least $5,000. The agency sets mortgage
amount limits by state, county or area, and you can look your area up through a
searchable tool on its website.
security in having the consultant. Most people doing a major home improvement
project hire a contractor on their own, notes Stuart Blend, regional sales
manager for Planet Home Lending. But with a standard 203(k) loan, the
consultant is your project manager, who assesses costs and plans, and oversees
take out that loan, that money rests with the lender. We’re holding those funds
in escrow, and we’re making sure everything is done the way it’s supposed to be
done,” Blend says.
to finance your home renovation is by taking out a home equity loan, also known as a
second mortgage. This is a one-time, lump-sum loan, so it’s not subject to
fluctuating interest rates, and monthly payments remain the same for the loan
loan is the home equity line of credit, or HELOC. It has a
revolving balance and might be best for someone who has several large payments
due over time, as with a big home-improvement project.
option, you’re pledging your home as collateral, meaning that if you don’t make your payments, the lender will
end up owning your house. Alternatively, you can take out an unsecured personal loan to avoid
putting up your home as collateral.
mind that HomeStyle and FHA 203(k) loans have some advantages over home equity
loans, especially if you don’t have a ton of equity in the property.
amount with either of these is based on the completed value and not the present
value. A home equity loan is based on the current value,” says Harris of
BBMC/Bridgeview Bank Group.
refi allows homeowners to refinance their mortgage. This mortgage will be for a
higher amount than the first one, and the homeowner gets the difference in
equity loans and HELOCs, cash-out mortgages require homeowners to use their home as
collateral. A refinance works especially well if you can get a lower rate than
with your current mortgage. Combine the lower interest rate with the added home
value derived from renovations, and you could benefit more in the long run.
at least 20 percent equity in your home to qualify for cash-out refinancing.
The total loan amount is generally limited to the available equity in your
home. Credit score requirements vary per loan amount and value of your home,
but generally start at 640.
for those who can’t — or don’t want to — tap home equity is applying for a
personal loan from a bank, credit union or online lender. Unlike a refi or home
equity loan, a personal loan is unsecured — meaning you don’t have to put up
your home or any other collateral. Instead, eligibility for the loan is based
strictly on your credit score, income and financial history. There’s no need
for a home appraisal and funds for your renovation project can be available
consumers with excellent credit scores–720 or higher–get the best interest
rates, averaging well below 10 percent APR. Those with good or average credit
scores, between 630 and 719, can generally expect to pay higher interest rates.
Certain lenders extend personal loans to consumers with credit scores as low as
580, though rates tend to be much higher still.
rates, check out Bankrate’s Personal Loan Center.
personal loan is appropriate, you can quickly get an idea of available lenders
and estimated interest rates by entering a few pieces of information into
Bankrate’s loan pre-qualification tool. If you’re
eligible for quick approval, you may soon be ready to move forward with your
dream of a new kitchen, bathroom or other home project
generally a good time to seek a loan, as interest rates are still hovering at
or near historic lows and lenders are looking to hand out cash to borrowers.
The key is to have a realistic idea of project costs and secure the type of
loan, with a competitive interest rate, that’s right for your situation.
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