There was once a time when financing a home renovation was a matter of either using savings or finding a loan. Whereas using funds saved did not require additional paperwork, getting an advance for home repairs and upgrades was a bit more difficult. Not only did you have to prove a certain income but your credit score also needed to be relatively high for approval. Now, things are a bit different.
Getting a Loan
Of course, you still have to prove that your income is enough to cover the loan. Your credit score, however, does not necessarily have to be excellent to be approved for a home renovation loan. In fact, many homeowners are finding increasingly available options for financing their renovations which let them borrow even with less-than-perfect credit scores.
Home Equity Loans
Home equity loans come with tax benefits that you find in convention mortgages but lack the closing costs that typically make traditional loans more expensive. Once approved, you receive the entire loan amount upfront and have the option of paying the amount over the next 15 or 30 years. It may be best to pay off a home equity loan in a shorter time span since interest rates on these advances tend to be higher than average.
Home Equity Lines of Credit
The benefit of home equity lines of credit is their ability to work like charge cards. Instead of being assessed interest for the full amount of the advance, your loan is only appraised for the funds that you use.
You essentially pay less for a $50,000 equity line of credit than you would a traditional loan because you are not given all of the money at once. You can use half of the money on renovations and still have funds available for miscellaneous expenses that arise.
FHA 203(k) Mortgages
FHA 203(k) mortgages are unique in that they let you refinance your first mortgage and combine it with renovation costs to create one payment. Many homeowners take advantage of this financing option because of the benefit of keeping one mortgage payment instead of having two loans to worry about every month.
Mortgage refinancing is also based on the value of the home after upgrades, which means that you may be able to borrow more. Of course, advance limits vary by county and are usually pretty low. You have 30 years to repay an FHA 203(k) mortgage.
Regardless of the type of loan you choose to finance your home renovations, it is important to understand your limits. You should never borrow more than you are comfortable repaying and always factor in unexpected issues such as job loss or other financial setbacks that could lead to default. Talk to a realtor or someone within the mortgage industry to get all the details and to see what your best options are.
Remodeling your home is an exciting time, but you need to make sure you aren’t being taken advantage of. Before you hire anyone, read our post on how to avoid hiring an unprofessional contractor. This will save you a lot of time and money!
References
