home renovation loan

Ready to renovate? 3 smart ways to finance 3 types of home upgrades

Bethany Ramos First-Time Homebuyer, Home Buying, Home Improvement, Homeowners, Refinance

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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. Within the last few years, the housing market has seen two trends emerge: Home renovations have spiked, and the inventory of homes for sale has plummeted.

Why remodel? Up your resale value and improve your quality of life

If there’s a six-month supply of available homes for sale, it’s considered a “normal” housing market. But the National Association of Realtors’ recent Existing Home Sales Report shows our current supply as low as 4.1 months.

Low inventory like this makes many homeowners worry they won’t find the new home they’re looking for if they decide to list their current house. So, more homeowners are opting to renovate. Other brand-new buyers are taking on fixer-uppers so they can craft the home of their dreams.

HomeAdvisor confirms that homeowners spent $7,560 in home improvements in the past 12 months on average. This also includes the buyers who purchased fixer-uppers.

Zillow posed the question in a recent study:

“Given a choice between spending a fixed amount of money on a down payment for a new home or fixing up their current home, what would you do?”

Of the participants surveyed, 76 percent said they’d rather renovate and upgrade their current house than make a move. Now it makes sense why comfort upgrades for homeowners who’d prefer to stay put, along with fixer-upper renovations and repairs after a severe weather event, are some of the most common.

How to fund home remodels, fixer-uppers & post-disaster repairs

For homeowners and new buyers, home improvements can generally be broken down into three categories:

1. Do you: Want to purchase a home and fix it up?

Consider an FHA 203(K) 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 allow you to borrow extra money, within one home loan, to fund a home purchase and its improvements. These one-time close loans — with one set of closing and lending costs — can also be used to finance repairs.
  • Each renovation loan has different contingencies, repair amounts, and timelines. The FHA 203(K) Limited loan, for example, allows for up to three contractors, doesn’t have a minimum repair amount, and is great for minor rehabs.

Time is money. Get prequalified now and fix your fixer-upper faster when you find it.

2. Do you: Want to remodel the home you currently live in?

Consider a cash-out refinance:

  • This can give you access to a lower mortgage interest rate that yields a lower monthly payment.
  • Refinancing to replace your existing mortgage with a new loan, and likely lower your monthly mortgage payment, can free up extra cash that you could use to pay for home renovations. That’s why it’s always a good idea to get a yearly check-up with your loan officer to keep your mortgage in optimal shape.
  • In the case of a cash-out refinance, you may access some of your home’s equity (with potential increases of up to $40,000) at up to 80 percent of its value.

3. Do you: Need to renovate after a disaster?

Consider a HomeStyle renovation loan:

  • This loan program can be used for buying a fixer-upper or refinancing an existing mortgage.
  • When a home’s been impacted by a disaster, you can take out a HomeStyle renovation loan to repair or renovate anything permanently attached to the house that increases its value.
  • Also a one-time close loan, the HomeStyle renovation loan allows improvements to be financed at up to 75 percent of the home’s “as-completed” value after upgrades are finished. Since the HomeStyle reno loan has competitive rates, it can be more affordable than taking out a home equity loan or HELOC.

Any homeowner bringing out the big guns, either rebuilding a portion of a house or doing a total flip, can look into a construction loan as another option. In most cases, a construction loan is granted as a short-term loan. Money is released in stages until the renovation is complete.

One- and two-time close construction loans give homeowners the freedom to customize their rebuild and their mortgage:

  • With a one-time close construction loan, or construction-to-permanent loan, you’ll get approved for both the construction and permanent loan at the same time. Once construction is finished, this loan becomes a traditional mortgage.
  • With a two-time close construction loan, you’ll get approved for two separate loans. The initial approval and closing will help you obtain financing for your construction loan. The second closing refinances you to a permanent loan once construction finishes.

A one-time close construction loan only requires you to pay for one closing instead of two, while a two-time close loan could allow you to switch to a lower rate when transitioning from a construction loan to a long-term mortgage. Each loan program has its own benefits that may work better for your project.

Do more for your home with a reno loan

Moving may not be in the cards right now, making it a prime time to renovate. Get connected with a local loan officer to find out how to get the funds you need to reduce out-of-pocket remodeling costs on your current home or how to buy and renovate that fixer-upper you’ve been eyeing. Make your house more homey — with the big-picture goal of increasing your property value — and start your new chapter.

*Refinancing could make a significant difference in the amount you pay each month. But 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.

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