Renovations became a priority for many homeowners when the pandemic started. Being stuck at home apparently changed people’s priorities from spending more money for a vacation to putting some investments on home repairs and remodeling instead. The problem now is how to fund these projects, especially if it’s a major one.
Applying for a loan to fund a home renovation project used to be difficult. People today have it easy. You’re lucky there are many options you can choose from. In fact, a mortgage broker can put together a loan that can fit your needs. And they’re not the only ones.
Here are other funding options you can consider for your upcoming major home renovation:
Cash-out refinancing is a viable option for major renovations because you get to keep the difference between your old and new mortgage loans. It starts by replacing the old mortgage with a new one that’s much larger, but with a new interest rate.
To gain more out of this loan, choose a shorter term and lower interest rate. Work with your lender and let them know your requirements. Otherwise, you’ll be extending the life of your loan and pay a higher interest rate.
For this option, you will need to pay taxes, origination fees, appraisal, and other closing-related costs.
Home Equity Loan
A home equity loan means you’ll be taking a loan out of the equity you’ve built on your home for a specific period. Equity meanwhile, is the amount of money you’ve already paid on your original mortgage loan. Because of this, a home equity loan is also often called a second mortgage.
When you take out a home equity loan, you’ll be receiving a lump sum, making it a great source of funds for a major home renovation. You’ll be paying this loan through fixed monthly payments over a preset number of years. What’s good about this is that the interest rate is fixed for the duration of the loan.
For this option, you will use your house as collateral.
Home Equity Line of Credit
A home equity line of credit (HELOC) offers more payment flexibility compared to a home equity loan. In fact, according to a CNBC report that recommended this option, a HELOC is a convenient way to access credit for homeowners looking for a way to fund their renovation project. They can access it when they need it. And then, they can pay it back over a flexible timeline where most lenders require repayment after eight to ten years.
This loan works by providing you a credit limit to your equity. You can withdraw funds based on the credit limit, while your lender charges interest only on the funds you loaned. Not on the whole equity.
Home Repair Loans
But if your budget plan is relatively small and you’ll be repairing a room or just a portion of your house, you can consider home repair loans. They are varied, depending on the lender, which are often banks, online lenders, and credit unions.
If you flip houses, this can also be a good option for you. You’ll need big cash for a major flip. Hard lenders, for example, can offer you quick access to cash even if you have a poor credit score. They will lend you money based on your property, not your credit history.
The Veterans Benefits Administration offers VA home loans similar to cash-out refinance loans.
On the other hand, loans insured by the Federal Housing Administration (FHA), also FHA 230 (k) mortgages, are great for fixer-upper projects. They will let you refinance your current mortgage and add in the new mortgage plus the cost of your house after it’s been improved. This means that your house now has a higher value, with bigger equity. It also means that with this loan, you can borrow a larger amount.
The U.S. Department of Housing and Urban Development (HUD) also offers loans, the HUD Titles I and II. USA Today recommends Title I for home improvements reaching up to $25,000.
Credit cards can only be a good option for major renovations if you’ll use an introductory one. They often have zero interest rates. To make the most out of this option, you’ll need to repay what you owe the bank before the introductory offer expires.
People have started to adapt to a life that is spent mostly at home. School, work, and play are now all done under the same roof. This makes home renovations a necessity that cannot be ignored anymore. So, before you apply for a loan, consider your needs. Do your own research about what’s best for your family and budget.