Take a long, objective look at your unique situation. Are you buying a new home or refinancing your current one? How’s your credit? How’s your equity? How extensive—and expensive—are the renovations you want to undertake? How fast do you need the money, and how much paperwork and hassle are you willing to go through?
All of these questions, and more, play a role in determining the best loan for your situation.
Are you a homeowner with lots of equity but a higher rate on your existing mortgage? A cash-out refinance can provide the money you need to fund your renovations while lowering your interest rate. If you have little to no equity built up or you’re struggling with your mortgage, a personal loan or line of credit may be your only option.
Are you dreaming of renovating a fixer-upper with “good bones” and lots of potential? Whether buying or refinancing, a no-equity-required FHA Title 1 loan or FHA 203(k) loan can provide the money you need. Although Title 1 loans are capped at $25,000 for single-family homes, they offer additional financing for up to five units in a multi-family property. Keep in mind that a 203(k) loan requires a great deal of paperwork and processing time, making it a less desirable option if you need to move in a hurry.
Have you built a decent amount of equity? Are you happy with your current mortgage rate? A home equity loan or line of credit can provide the financing you need to renovate your home just the way you want.
Are you buying or refinancing, need money for renovations, and don’t mind following a long list of rules? The FHA 203k or Fannie Mae Homestyle loan may be right for you. And, if you’re a veteran or active-duty military, don’t hesitate to take advantage of the benefits you’ve earned by serving our country. Take a good look at the low-cost, easy-to-qualify-for refinance loans from the VA.
Do you have bad credit? Government-backed refinance loans may be your best bet. Borrowers with lower credit scores and little-to-no home equity may consider taking out a smaller loan to get a lower interest rate or putting up collateral such as your car to get an affordable rate on a larger loan.
In a big nutshell, here is a top-line look the best option for every situation:
Can you lower your interest rate? Cash-out refinance
Looking at an older or fixer-up home? FHA 203(k) rehab loan
Undertaking a big, one-time project? Home equity loan
Planning several ongoing projects? Home equity line of credit
Have low-to-no equity? Personal loan
Doing smaller, short-term projects? Credit cards
An experienced and reputable Mortgage Loan Originator can help you navigate all the options and steer you in the right direction.
Before you knock out that wall, pick out paint, or begin mentally decorating the home office you’re planning to add, think about your long-term goals for your home and your family. Are you renovating to make your home safer, more comfortable, and more energy efficient? Or do you have grand visions of scoring big profits when you sell the home next year?
While it’s entirely reasonable and desirable to reshape your home to better fit your needs, your budget and your interests, do not expect to make a killing at resale. Homeowners rarely recoup 100% of the money spent on remodeling projects. Yes, an additional bathroom, updated kitchen or in-ground swimming pool can improve your equity and resale value. But not enough to pay for itself.
In fact, the home improvements that tend to generate the best ROI are some of the least exciting, like fiberglass insulation for the attic, a new steel front door, manufactured stone veneer, minor kitchen remodels, and garage door or siding replacements.
Borrowers see the worst ROIs from such sexy projects as a bathroom addition, installing a backyard patio, major or minor bathroom remodels, and major kitchen remodels. While such renovations may not pay for themselves, they can increase your home’s equity and value. If renovations make you happier, prouder and more comfortable in your home—and you can afford the expense and the hassle—a renovation loan can be well worth the investment.
Home improvements and the financial commitments that come with them are a massive investment of your money, time and sanity. Shop as carefully for your Renovation Loan as you did for your house.
- Shop around and talk to more than one lender, paying close attention to rates and terms, closing costs and fees.
- Beware of balloon payments, a large lump sum that is due before you can pay off your loan. You don’t want to be surprised just when you’re looking forward to being done with loan payments.
- Look beyond the interest rate. The lowest rate does not always indicate the least-expensive or best loan for you.
- For FHA 203(k) loans, be sure you understand the contractor disbursement schedule. They are designed to protect your—and your lender’s—assets and ensure you get the high-quality work you are paying for. Your FHA 203(k) consultant can help you understand the details.
- Check your rate variability. If rates go up on your variable-rate loan, it could raise your monthly payments and overall cost of your loan considerably. Ask if you have the option to convert the loan to a fixed rate down the road.
- Check your credit score before shopping or applying for a loan. It can be a good indicator of which type of renovation loan will best meet your financial needs as well as what your interest rate might be.