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Refi your DIY: What’s the right way to finance your home renovation?

home renovation loan
Reading Time: 6 minutes

Sick of the same old, same old? Want to reap more from your greatest financial investment? These are just some of the reasons homeowners renovate. Here’s another big one — many homeowners are motivated to renovate because they would rather stay in a house they already own instead of moving to a new home.

The Houzz & Home Overview of U.S. Renovation in 2015, published in 2016, gives us a better idea of what’s going on in home renovation, with takeaway facts like:

  • New homebuyers are more likely to renovate. Over a quarter of renovations come from recent housing purchases.
  • Sellers are interested in renovation too. Exterior remodels are some of the most popular projects for soon-to-be sellers hoping to improve curb appeal.
  • Few are counting the cost. About one-third of homeowners start their remodeling project with a clear budget in mind. Nearly one-third of owners also exceed the budget they set.
  • Millennial homeowners are just as likely to remodel as Baby Boomers. The key difference? Millennials spend only a third as much as the older age groups on their renovations.

Time is money. Getting prequalified fast could make it easier to get into your dream home when you find it.

Ready to renovate? Figure out the ‘why’ before the ‘how’

home renovation loan
The opportunity is there, and so is the margin for error. The Houzz & Home Overview reveals a glaring problem: Most homeowners either aren’t setting or stick to a budget. Understanding what you’re taking on, whether it’s a new mortgage, a new renovation project, or both, can help you make a smarter financial decision. That’s why we asked Dmitri Kara of FantasticHandyman.co.uk and the featured Google+ community Home & Love, with over 300,000 followers, to talk to us about the most common reasons he sees for home renovation.

As he explains in his exclusive interview with Cornerstone Home Lending, Inc., home improvements can generally be broken down into three categories:

  1. Improvements to quality of life.

These are the home improvements we do for the close and foreseeable future, Kara says. “This looks like the new second-floor toilet you want to mount to ease morning traffic, the flat-pack kitchen remodel that will fascinate all your guests, or the floor heating in the living room for those cold winter Sundays. The list goes on.”

Why remodel? Improving quality of life is highly subjective and unique to each individual home. And for some, comfort has no price. “That said, if you ever plan on moving and selling, you should try to keep the balance in check,” Kara advises. 

  1. Improvements to increase resale value.

Usually, if you add living space to your home, Kara says, its value will most likely increase. But in some locations where prices are lower, the return can sometimes be of negative value. Kara explains, “When adding more living space, keep in mind that if you follow the specific regulations, an extension or even a simple loft can become a bedroom, and that instantly sends your property into a whole new league.”

Lest you pour all your savings into funding remodels to increase your property value, Kara reminds us of his golden rule: Don’t outgrow your street. “A buyer looking for a $400,000 property wouldn’t want to live in a $200,000 street,” he explains.

Why remodel? Spending is up for kitchen and bathroom remodels, the Houzz & Home Overview of U.S. Renovation confirms. Kara adds that the bathroom and kitchen are the two most frequently used rooms in almost any house. “If you nail those down without breaking the bank,” he says, “You could make a good profit after a re-sell.”

More money, less problems? Homeowners, it might be time to refinance your mortgage.*

  1. Improvements for rentals.

If you’re a landlord or about to become one, domestic repairs, small carpentry, and routine improvements are typical handyman tasks you’ll become familiar with. “Not all tenants treat their home with the same respect they would if they owned it,” Kara says. “Furthermore, tenancies usually go for a couple of years tops. That makes renters less attached to the property and less inclined to care for its wellbeing. To put it bluntly, rentals go through heavy domestic maintenance costs.”

Why remodel? If you as a landlord plan to make any money at all, your improvements need to be built to last. For the bigger upgrades, Kara recommends investing in professional contractor services — to ensure quality and prevent costly accidents. “The same goes for new appliances, equipment, tools, and furniture,” he says. 

How to finance a home renovation: 6 options for homeowners

home renovation loan
You’ve figured out your “why” for the project. The next step is to set a budget based on your personal finances (consulting with your financial advisor and loan officer, as needed), and then, let the funding begin.

Consider one of six ways to pay for your home remodeling project:

1. Cash.

If you’ve got it, use it. For those with the available funds, this choice will be the most obvious. If you plan to save and pay for each upgrade, try tackling one small project at a time. Using a credit card is also a possibility for a smaller home reno, as long as you’re able to pay that amount back before it accrues high interest.

2. Mortgage refinance.

Refinancing your mortgage could give you access to a lower mortgage interest rate that yields a lower monthly payment. That’s why we always recommend a yearly check-in with your loan officer to keep your mortgage — and your finances — in optimal shape. Lowering your monthly mortgage payment with a refinance could free up extra cash that you could use to pay for your home renovation, as described in option number one. Your loan officer may also recommend a cash-out refinance that will allow you to access some of your home’s equity at up to 80 percent of its value.

Talking to your loan officer should feel like talking to a friend. Click here to learn more about the Cornerstone experience.

3. Home renovation loan.

This option works if you’re a homebuyer who plans to renovate as soon as you get the keys to your new house. Renovation lending programs like the FHA 203(K) Limited or Full or FNMA Homestyle (Conventional) loans allow you to borrow extra money, within one home loan, to fund a home purchase and its improvements. A home renovation loan can also be used to finance repairs. Each renovation loan product has different contingencies, maximum repair amounts, and timelines that can be explained in detail by your loan officer. The FHA 203(K) Limited, for example, requires home repairs to begin within 15 days and to be finished within six months of closing.

4. Home equity line of credit (HELOC).

A home equity line of credit is taken out as a revolving credit line, using your home’s value as collateral. Similar to a credit card, a HELOC offers a line of credit that you can use to fund larger repairs or consolidate other loan debts. The interest on a home equity line of credit is normally tax-deductible and lower than other loan types. And like other mortgage loans, a HELOC could leave your house at risk if payments are delayed or stopped altogether.

5. Home equity loan.

A home equity loan differs from a home equity line of credit in that it’s a second home loan used to access your home’s equity, without needing to refinance. A home equity loan may be a better option than a refinance if you have a large amount of equity available to you. The main difference between a home equity loan and a cash-out refinance is that the former creates a second mortgage on your home, while the latter converts your existing mortgage into another mortgage with different and more competitive terms. You may choose not to refinance your first mortgage if it already has a low interest rate. In this scenario, taking out a second mortgage makes more sense.

6. Construction loan.

This final option can work well if you’re a homeowner bringing out the big guns — rebuilding a portion of your house or doing a total flip. Construction loans are harder to come by and have more stringent requirements. In most cases, a construction loan is granted as a short-term loan, and money is released in stages until the renovation is finished.

Moving may not be desirable or feasible right now, making it a prime time to renovate. You might also choose to renovate if you want to put on the finishing touches and turn your new house into a home. Homeowners of all age groups are taking a hard look at the potential to increase their homes’ values through carefully-selected upgrades. Some news outlets have gone so far as to describe this renewed reno boom as “using a house as an ATM.” If home values are rising in your neighborhood, you may be able to access even more cash to renovate when you refinance or take out a second mortgage.

For the mortgage questions only a loan officer can answer, we’re always available to help. Get in touch to find out how to fund your home renovation in a way that benefits you and your family — with the big-picture goal of increasing your property value.

*While refinancing could make a significant difference in the amount you pay each month, there are other costs you should consider. Plus, your finance charges may be higher over the life of the loan.

For educational purposes only. Please contact your qualified professional for specific guidance. 

Sources are deemed reliable but not guaranteed.