Financing Your Remodel
Okay, you’ve heard about the cost and (of course) it’s way more than you expected. So what are your options? Let’s look at five options:
Home Equity Loan (second mortgage)
Typically banks loan up to 80% of your homes value, but can loan up to 90% for a higher rate. Typically banks only consider the homes current value, not the value after the renovation. Loan term can be a full 30 years like a standard mortgage, but home owners typically choose a shorter term which gets them a better rate . Unlike a refinance, there are no considerable closing costs.
Home Equity Line of Credit (HELOC)
This loan has similar rates to a home equity loan, it can also be up to 80-90% of your total home value, and has no considerable closing costs. What makes this choice different is more flexibility. Your bank gives you an amount that you can take out, but you take the money as you need it and you don’t pay interest on the amount you haven’t drawn yet. This is a great option for projects that have a long timeframe and projects that may need additional funds. Consider taking out a larger amount loan to get a better rate even if you don’t need to use all the funds.
Home Improvement Loan or Construction Loan:
Many banks base the loan on ‘as completed value’, (value after the renovation is complete) for this type of loan, which means you may be able to borrow more. However, the bank is more involved in the whole process. They usually put the money in an escrow account and have a consultant monitor completion points and payments. This might slow the construction process down. If you are looking to purchase a fixer upper and take out a mortgage and renovation loan together, this may be the loan for you. The bank will package the mortgage and renovation loans together. Banks can also package this as a line of credit, but in the end it converts to one loan with one payment.
FHA 203K
Similar to a construction loan, the FHA 203K is geared toward the purchase of a fixer upper (often uninhabitable) and the bank is involved in the process. But now the government is involved too. Sounds fun, right? This type of loan is not really supposed to be for a luxury renovation as much as a functional or livable project. More hoops to jump through will get you a better rate and the ability to borrow up to 96.5% of the ‘as completed value’. This is not available to an investor, only to homeowners and non profits.
Refinance
Home owners may want to refinance their mortgage to fund their renovation. This is a good option if your current loan has a high rate or if you want to change the length. Unlike a home equity loan, refinancing comes with closing costs. All financial information in this article is not financial advice from Airy Kitchens. Homeowners should check with a qualified loan officer to make the best decisions for their home projects.