Did you know that over 50% of homes in the US were built before 1980? This means that most homes in the country need some kind of remodel or renovation done to them. But how do you finance your grand plans?
One of the most cost-effective ways is to borrow against the home value after your changes get made. Read on as we give our guide on a home renovation loan.
A home renovation loan is a way to borrow money based on the value of a property after renovation. It will use the estimated value after modifications are made to calculate how much the borrower can lend, not against the current value of the property.
This is very different from a home improvement loan. These are generally unsecured loans for improving a property. In essence, they are personal loans, not loans that use the home's future value as collateral.
Renovation loans have many advantages over other ways to finance your property. The most obvious is that they have lower interest rates compared to other types of loans. You don't need to have credit card-level rates or use savings to finance a renovation.
All this adds money to your home value. When you decide to sell, it will be worth more and you will have increased the home equity quicker.
Finally, by combining a mortgage and remodeling loan, you simplify the payment process and make it easier to manage your budget. This will also let you claim a larger tax deduction due to interest.
A home renovation loan should be considered in two instances. The first is when you are sure the renovation will reduce your long-term costs. The second is when you are certain it will increase property value.
Projects that could reduce your long-term costs are usually anything that improves energy efficiency or security. Attic insulation along with cooling and heating systems are some ideas. The ones that increase property value are new roofing, extensions, and new rooms.
Should your planned home renovation seem like it fits the category, then begins to weigh up the risks. Start by checking how much equity you have in the home. You have more risk of defaulting if you have less.
Finally, make sure you don't add too much value, particularly if you are thinking of renovating to sell. If you go higher than the upper market value of homes in the area, you may find a lack of interest from buyers.
Home renovation loans come in lots of different types and get backed in different ways. Below are two of the most common.
These loans get backed by the government's Federal Housing Authority. This makes them useful for people with a low downpayment or for those who have a bad credit history. Loans can last between 15 to 30 years with a fixed interest rate.
FHA loans also come in limited and standard types. Limited ones are intended for non-structural repairs. This goes up to $35,000.
Standard ones are used for major construction work. This may involve repairs and additions to the property. For this, you need to get an approved consultant to work with you.
If the borrower has a large downpayment and a good credit history, then a Fannie Mae-style loan can be a great option. It can even be used for a range of things, even for the finance of rental properties. It offers higher loan limits and has no restrictions on repairs.
This is a construction loan that creates a new mortgage and replaces the existing one. Money from these loans gets paid to the contractor, not the homeowner. They have low rates, monthly payments, and a single close for reduced costs.
However, you will find many contractors refuse to take on construction loans. The disbursement of funds and inspections are complex, adding to their task. As you are refinancing, it also cuts down on building equity in the home.
Before you go for a home renovation loan, there are a few ways you can prepare yourself. Below are the most important ones.
If you are going to buy, refinance or renovate, then have a realistic budget in mind. A mortgage loan originator will be able to help you determine this through your sales price and renovation bid. You may also be able to get pre-qualified at this point.
The next step is finding the right property. You need to find one in the right location, with the correct size.
You must also make sure you find the right contractor for the job. Certain types of loans can make this hard, as many will avoid these jobs due to the red tape involved. Make sure you trust the one you choose.
When the mortgage is being processed, you need to be patient and give it time. If the loan is being reviewed, make sure you stick to the plan in place and don't change contractors. If you do, you may end up starting the process over again.
Now you know all about a home renovation loan, decide if it is for you. When you are ready, make sure you speak with a few lenders. Many will be willing to give advice and assistance.
Southern Home Loans has a range of conventional, federal, and special loans to finance your property. A division of Goldwater Bank, we strive to get our clients the best rates possible. Get a free quote here and let us help build your dream home.