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. This is another big one: Many homeowners are motivated to renovate because they’d rather stay put and improve the house they already own, instead of moving to a new one.
Or, maybe you just bought your home and are ready to take on a few projects. You’re definitely not alone. The housing market is currently so competitive that many more homebuyers are willing to purchase a house “as-is” — in order to get the home they love — and fund their own upgrades. Keep reading to find out your finance options.
Before you renovate: Figure out your ‘why’
Home improvements can generally be broken down into three categories for:
1. Bettering your quality of life.
These are the updates you make for the close and foreseeable future. Think a new second-floor toilet to ease morning traffic, a flat-pack kitchen remodel to impress your guests, or floor heating in the living room for those cold winter days. Spending more time at home over the past year may have spurred as many as 74 percent of homeowners to tackle more personalized DIY projects.
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, it’s a good idea to keep your comfort upgrades in balance.
2. Increasing your resale value.
Usually, if you complete in-demand renovations, like replacing siding or remodeling a bathroom, your home’s value will likely increase. But in some locations where prices are lower, you may not get the desired return. Lest you pour all your savings into upgrades, remember the golden rule: Don’t outgrow your street. Take cues from your neighbors and the typical upgrades seen in your home’s price range.
Why remodel? Kitchens and bathrooms are still the most popular rooms to renovate, the Houzz & Home Overview of U.S. Renovation confirms. These are the two most frequently used rooms in any house. Nail these renos without breaking the bank, and you could make a good profit when you sell.
3. Maintaining your rental property.
If you’re a landlord or about to become one, domestic repairs and routine improvements are handyman tasks you’ll become familiar with. Unfortunately, not all tenants treat their home with the same respect they would if they owned it. And, tenancies usually last for a few years. This makes renters less attached to the property — and rentals more like to incur heavy maintenance costs.
Why remodel? If you as a landlord want to continue making money, your improvements need to be built to last. Knock out the repairs you feel confident fixing yourself. For the bigger upgrades, consider investing in professional contractor services — to ensure quality and prevent costly accidents.
6 handy ways to finance your home renovation
Now you know your “why.” The next step is setting a budget based on your personal finances (consulting with your financial advisor and loan officer, as needed). Then, let the funding begin.
Consider one of six ways to pay for your remodeling project:
- 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 interest rate that yields a lower monthly payment.
- Lowering your monthly mortgage payment with a refinance can 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 your home’s equity at up to 80 percent of its value.
3. Home renovation loan.
- A home renovation loan is a great choice if you’re a homebuyer who plans to renovate as soon as you get your keys; you can also use this loan for the same purpose when you refinance.
- Renovation lending programs allow you to borrow extra money, within one home loan, to fund a home purchase/refinance and its improvements. A home renovation loan can also be used to finance repairs.
- Each home renovation loan product has different contingencies, max repair amounts, and timelines that can be explained in detail by your loan officer.
See a few examples of these home renovation loans below:
- The FHA 203(k) Limited loan works well for both buyers and owners refinancing for an upgrade. This loan is frequently used for minor cosmetic, health, safety, and livability updates and has a max repair amount of $35,000.
- The FHA 203(k) Standard loan has fewer restrictions than the limited version and can be used for structural and major rehab projects. This loan has a repair minimum of $5,000 with a max set at less than a local county’s FHA loan limit.
- The FNMA HomeStyle® Renovation program is an all-in-one home renovation loan, preferred by many refinancing homeowners because of its flexible credit requirements. Even better, this loan can be used for almost any improvement, whether a small repair or a luxury pool upgrade, as long as it adds value to your property.
- The FNMA Postponed Improvements loan can be used by buyers purchasing new construction and by homeowners refinancing a mortgage. Like the HomeStyle loan, almost any renovation is permitted, as long as it’s not DIY and adds value to your property.
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 you can use to fund larger repairs or consolidate other loan debts.
- The interest on a HELOC is normally tax-deductible and lower than other loan types.
5. Home equity loan.
- A home equity loan differs from a HELOC in that it’s a second home loan used to access your home’s equity, without needing to refinance.
- A home equity loan might be a better option than a refinance if you have a large amount of equity (which may be the case as tappable equity has recently reached the largest recorded amount to date).
- 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.
6. Construction loan.
- This final pick 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 typically 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 reno is finished.
If moving isn’t desirable or feasible right now, it may be 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.
As ATTOM Data Solutions’ 2021 U.S. Home Equity Report states:
“17.8 million residential properties in the United States were considered equity-rich. Meaning that the combined estimated amount of loans secured by those properties was 50 percent or less of their estimated market value.”
A growing number of homeowners have yet to take advantage of this surplus of equity. Just accounting for mortgages funded by Freddie Mac, at least 5 million homeowners could benefit from a refinance. As mentioned, refinancing may either lower your monthly payment by hundreds of dollars or allow you to cash out on record-high equity, providing you with a large sum to renovate.
If home values are up in your neighborhood (as they’re likely to be in most areas), you may be able to access even more cash.
For the mortgage questions only a loan officer can answer
We’re just a call (or a click) away. Get in touch to find out how to fund your renovation in a way that benefits you and your family — with the big-picture goal of increasing your home’s 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 deemed reliable but not guaranteed.