Whether you are preparing to sell your home or you just want a refresh for a new season, a home renovation project is a big undertaking. One of the biggest questions to answer as you plan any home renovation is how to pay for it.
Thinking ahead about how to finance your home project is essential for avoiding headaches in the future. There are many different options to pay for your home project depending on your financial status and goals.
Many homeowners, especially with the current rise in equity, can access that equity and turn it into cash for home improvements by using a home improvement loan. But exactly what can a home improvement loan be used for? Let’s take a look at this and other options to consider as you make your plan so you can make a choice that is wise for your financial future.
Home Improvement Loan Types
Home improvement loans allow you to finance home repairs and updates, which can improve your home’s retail value and aesthetic appeal. You might use a home improvement loan to finance a kitchen remodel or finish your basement, for example. Unlike home equity loans, which are secured by your home, unsecured personal loans for home improvement don’t require collateral. The best home improvement loans offer quick and easy access to the funds, no prepayment penalties, and have flexible repayment terms.
There are many different types of home improvement loans available for bowers to choose from. Let’s take a brief look at what type of loans are available for you to consider.
Fannie Mae HomeStyle Loan
Fannie Mae’s HomeStyle renovation mortgage is an all-in-one purchase loan and home improvement loan. It’s a great option for buying a property that needs a little—or a lot—of work, whether you’re buying a home to live in full time, part time or as an investment property.
The HomeStyle Renovation loan is super flexible when it comes to the repairs and upgrades you can finance. You can:
- Gut the house and redo the interior, including the bathrooms and kitchen.
- Build an accessory dwelling unit—a smaller separate residence—on the property for your mom or dad to live in, or to rent out.
- Add permanent landscaping features, like trees or a retaining wall.
- Add luxury features, like an in-ground swimming pool or outdoor kitchen.
In short, you can do just about anything, as long as it will be permanently affixed to the property. And you don’t have to go big: If you just want to finance new floors and new paint, that’s fine too.
Cash-out Refinance
One popular way to get money for a home remodeling project is with a cash-out refinance wherein you refinance to a new mortgage loan with a bigger balance than what you currently owe. Then you pay off your existing mortgage and keep the remaining cash. The money you receive from a cash-out refinance comes from your home equity. It can be used to fund home improvements; although there are no rules that say cash-out funds must be used for this loan purpose.
Some advantages of a cash-out refinance are:
- You may be able to adjust the term length to pay off your home sooner.
- The cash-out comes from your home’s equity
- You will continue making one mortgage payment
- You can spend the cash on anything
FHA 203(k) Rehab Loan
An FHA 203(k) rehab loan bundles your mortgage and home improvement costs into one loan.
But with an FHA 203(k), you don’t have to apply for two separate loans or pay closing costs twice. Instead, you finance your home purchase and home improvements at the same time, when you buy the house.
FHA 203(k) rehab loans are great when you’re buying a fixer-upper and know you’ll need loan funding for home improvement projects soon. And these loans are backed by the government, which means you’ll get special benefits — like a low down payment, and the ability to apply with a less-than-perfect credit profile.
Home equity loan/Home equity line of credit
A home equity loan (HEL) allows you to borrow against the equity you’ve built up in your home. Your equity is calculated by assessing your home’s value and subtracting the outstanding balance due on your existing mortgage loan.
Unlike a cash-out refinance, a home equity loan does not pay off your existing mortgage.
If you already have a mortgage, you’d continue making its monthly payments, while also making payments on your new home equity loan.
A home equity loan “is dispersed as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney. With a home equity loan, your home is used as collateral. That means similar to a mortgage, lenders can offer lower rates because the loan is secured against the property.
You could also finance home improvements using a home equity line of credit (HELOC). A HELOC is similar to a HEL, but it works more like a credit card. You can borrow from it up to a preapproved limit, pay it back, and borrow from it again. Another difference between home equity loans and HELOCs is that HELOC interest rates are adjustable — they can rise and fall over the loan term.
However, with an HELOC you’ll have to put your home up as collateral, so it could be foreclosed if you don’t make payments on time. Most HELOCs also have variable interest rates which mean your payments can increase depending on market conditions.
Personal Loan
If you don’t have tons of equity to borrow from, an unsecured personal loan is another way to finance home improvements. Because a personal loan is unsecured, you won’t use your home as collateral. That means these loans can be obtained much faster than HELOCs or home equity lines of credit. In some cases, you may be able to get loan funding on the next business day or even same-day funding.
Personal loans can have adjustable or fixed rates, but a personal loan normally has a higher interest rate than a home equity loan or HELOC. That said, if you have excellent credit or even just good credit, you can likely get an affordable rate.
The payback period for a personal loan is less flexible: Often it’s two to five years. And you’ll probably pay closing costs. Still, if you don’t have much equity in your home to borrow against, a personal loan can be an option to pay for home renovations. These loans can also make sense to finance emergency home repairs — if your water heater or HVAC system must be replaced immediately, for example.
Credit Cards
You could also finance some or all of your remodeling costs with credit cards, too. This is the quickest and simplest financing option for your home improvement project. After all, you won’t even need to fill out a loan application.
But because home improvements often cost tens of thousands of dollars, you need to be approved for a higher credit limit. Or, you’ll need to use two or more credit cards.
Plus, the interest rates charged by most credit cards are among the highest you’ll pay anywhere.
In Conclusion
Home renovations can cost a lot, but the good news is you don’t have to produce the cash out of pocket. Home improvement loans let you finance the cost of upgrades. As you’ve seen there are number of financial products to help you pay for your desired improvements.
At the Hadley Team we’re here to help you decide which the best financing option for your project is. And, depending on the direction you choose to go, we can speed up your loan closing by getting you pre-approved. So, let’s connect and get your project off the ground!
