Tuesday, May 15, 2018

Home Renovation Loan Options

Home Renovation Loan Options
There is a home renovation loan for virtually every project, from remodeling a bathroom or replacing some sidings, right through to a subbasement-to-chimney-pot make-over. One even lets you buy a ruin, tear it down, and build anew from scratch, all within a single loan.

Which home renovation loan is right for you will depend on many factors. These include:

- How much, if any, “equity” you have in your home (by how much your home’s market value exceeds your mortgage balance).

- How much you need to borrow.

- What your credit score is.

- Whether you need money for things besides the renovation.

So let’s explore some of your options so you can identify which is best for you.

How Home Renovation Loans Work

Some loans are tailor-made to fund home renovations. These often require you to spend every cent on your project. If you need to borrow for other purposes at the same time – perhaps to buy new furniture for your newly renovated home – you may require either two loans or a different type of loan that is more flexible.

But the advantage of a specialist home renovation loan is that it’s been engineered to meet the needs of someone in your situation. And that means it may deliver worthwhile benefits you don’t get with more generic lending products. For example, these are the ones that allow you to use a single mortgage to buy a run-down or derelict home – or even a ruin – and restore, rehabilitate, refurbish, or rebuild it. When used as mortgage refinances, they let you carry out similarly extensive improvements to your existing home.

Types of Home Renovation Loans

Here are three of the most popular versions of home renovation loans. Which is best for you will depend on your personal circumstances and needs:

Fannie Mae HomeStyle® Renovation Mortgage

This may be best if you want to keep the long-term cost of your borrowing low. That’s because you may have to pay mortgage insurance for a shorter time than with an FHA loan. However, there are higher down payment requirements and stricter limits on the proportion of your loan that you can spend on renovations.

- Minimum 5 percent down payment – More if you want an adjustable-rate mortgage, or plan to rehabilitate a multi-unit dwelling or a second home.

- Subject to the usual Fannie Mae loan caps.

- An independent appraiser must assess the “as completed” value, which is what he or she thinks the home will be worth when all the work has been finished.

- For purchase mortgages, your loan-to-value ratio (and thus your down payment) will be calculated on the lesser of the as-completed value and the actual costs of purchase plus rehabilitation.

- If you plan to do some or all of the renovation work yourself, the lender may agree to that. But your hours of labor cannot be claimed as a cost. And the do-it-yourself element cannot exceed 10 percent of the as-completed value. Additionally, inspections will be required for all work items that cost more than $5,000.

- Renovation costs (labor, materials, fees, permits, licenses, contingency) are limited to 50 percent of the as-completed value.

Federal Housing Administration (FHA) 203K Rehab Mortgage

A 203K Rehab Mortgage is more flexible and accessible than the Fannie Mae product. But those pesky mortgage insurance premiums add up over the years.

- Minimum 3.5 percent down payment.

- You may be able to borrow up to 110 percent of the appraised value of the property post-rehab, but only if the actual costs of purchase and rehab exceed that.

- The budget for rehabilitation work must exceed $5,000.

- The total cost (purchase of property plus rehab improvements) cannot exceed the FHA loan limit for the area.

- You can buy a home that has been – or will be – demolished, providing that the original foundation systems remain in place.

FHA Title 1 Loan

Title 1 Loans can be great if you’re renovating or remodeling parts of your existing home or building an addition. But you can’t borrow as much as with the others, so these loans may not cover really big projects.

- You can borrow up to $25,000 for alterations, repairs, and site improvements on a single family home – more on multi-family residential buildings.

- You can use one of these to improve a manufactured home.

- If you borrow $7,500 or less, you may not need a mortgage as such. But, the FHA says, “Any loan over $7,500 must be secured by a mortgage or deed of trust on the property.”

- Your loan’s maximum term is 20 years – or less for manufactured homes.

Home Equity Borrowing

You can use the “equity” (the amount by which your home’s market value exceeds your mortgage balance) you’ve built up in your home to secure home equity borrowing. This comes in two flavors: home equity loans and home equity lines of credit (HELOCs). Read on to discover the differences between those two. If you want, get more detail from Home Equity Loan vs Home Equity Line of Credit.

These are sometimes called second mortgages and they come with closing costs, though, those are typically significantly lower than you’d pay for a first mortgage or refinance. Because your home is used as security – and is at risk if you don’t keep up with payments – lenders stand a much lower chance of being out of pocket if you default. And that means they almost always offer much lower interest rates on these than they do on unsecured loans. Indeed, those rates are often only a bit higher than you’d be offered if you were applying for a first mortgage.

Home equity borrowing can be used for any purpose you want. So, if you wish to re-furnish as well as refurbish your home, you can do so with a single loan. Indeed, you can combine a renovation project with any other expense you’re facing – from topping up a college fund or paying for a wedding, to buying a boat or taking the vacation of a lifetime. Just remember you could be paying back what you borrow for decades to come.

Although these are any-purpose loans, money from them you spend on home improvements should normally be tax efficient, in the sense you can usually deduct your interest payments. Check with a professional to see if this applies in your circumstances.

Home Equity Loan

A home equity loan is an installment loan, like an auto loan or a personal loan. You borrow a lump sum and repay it in installments over an agreed period. Many home equity loans have fixed interest rates, meaning your first month’s payment should be the same as your last.

This makes them a favorite among conservative and responsible borrowers, who don’t want the temptation of a line of credit and who value the predictability of fixed payments when budgeting. Learn more at How Does a Home Equity Loan Work?

Home Equity Line of Credit

A home equity line of credit is more like an ultra-low-interest credit card than an installment loan. You are given a credit limit and you can borrow as much or as little as you want up to that. You can repay and re-borrow as often as you like, and you only pay interest (often at variable rates) on the balance you owe at the time. In banking jargon, this is called “revolving credit.”

This means they’re suitable for those who value flexibility over predictability. Though, they can still be highly attractive to cautious borrowers who are also self-disciplined.

HELOCs differ from credit cards in a number of ways, most notably in that they have end dates, by which time all borrowing must be repaid. Some come with a “draw” period of often five or 10 years, during which you can borrow up to your limit and make just minimum payments that cover only the interest due. But these are followed by “repayment” periods, often 10 or 20 years, during which you can’t borrow any more, and have to pay down both the principal (the amount you borrowed) and continuing interest charges. The switch from the draw period to the repayment one can lead to payment shock for unprepared borrowers and needs to be taken seriously.

Cash-Out Refinance

A cash-out refinance is typically the least expensive type of home renovation loan. True, your closing costs are likely to be higher, but over the years the lower interest rate you pay should easily outweigh those. And you can normally roll up such costs within your new loan, or opt for a “ no-closing-cost refinance.”

There are exceptions to one of these refinances being the cheapest option. That’s because they involve your getting a whole new mortgage.

That’s great if you are paying a higher or similar rate on your existing mortgage than you could get with a new one. But if you were lucky enough to get that existing mortgage during a time when mortgage rates were lower than they are now, a refinance might not make sense.

Do the Math

Luckily, making the right choice is a simple question of math. Use the LendingTree Cash-Out Refinance Calculator to get a feel for what your new payments might be. Then see what you would be paying on your existing mortgage plus a home equity loan or HELOC.

Remember to take into account that your loan or line of credit may last for a shorter time than your mortgage. So look at your overall costs of borrowing as well as your monthly payments.

Contractor Financing

Many contractors have relationships with lenders and will include financing options within their sales pitches. They’ll likely make them sound affordable, hassle-free, and quick to arrange.

However, it is highly likely the contractor financing you are offered will be significantly more expensive than any of the options described above. There may be exceptions, and you may decide to ask the salesperson to give you a quote. But don’t sign anything until you have shopped around, discovered what’s available, and made side-by-side comparisons.