Home renovation can help improve the curb appeal of your home and increase its value if you want to sell soon. And if you want to stay for a bit, renovations can make your space more delightful when you’re there.
Here are some options to help you make the visions you have for your home a reality.
How Much Can You Borrow for a Home Renovation?
It depends on the loan product you select. Most lenders who offer home equity loans use the loan-to-value (LTV) and cap the maximum loan amount at 80 percent.
To illustrate, if your current home value is $325,000 and you owe $225,000 on your existing mortgage, you will have $100,000 in equity, but your loan amount is limited to $35,000. Here’s the calculation: your current home value ($325,000) X the maximum LTV of 80 percent (.80) – the amount you still owe ($225,000).
How Can You Finance a Home Renovation?
You can finance a home renovation with a home equity line of credit (HELOC), home equity loan, personal loan, cash-out refinance, government loan, home remodel loan, or home repair loan. If you have a credit card with a sizable amount of available credit, you can also use it to finance your project. But be mindful that credit cards have exorbitant interest rates and may not be the best option to fund your projects.
When researching your options, consider the following:
- What’s your budget for the renovation?
- How much can you afford in monthly loan payments?
- How long do you want to make loan payments?
- How long will it take to complete the project?
- How much equity do you have in your home?
- How much can your home value potentially increase after completing the renovation?
- If refinancing is a viable option?
Should You Finance Your Home Renovation?
If you want to renovate your home but don’t have the funds, financing the projects could be a worthwhile investment. You’ll add value to your home and boost your equity without stretching your finances too thin, borrowing from others, or emptying your retirement accounts. Assuming you secure a competitive interest rate on a loan product, you will also have the ability to make monthly payments that work for your budget for an extended period.
Ways to Finance Your Home Renovation
Here’s a breakdown of the types of loans and credit cards you can use to fund your renovation projects.
Credit Card
As mentioned earlier, credit cards are an option to finance your home renovation if you don’t have cash on hand. You are likely to pay more in interest, but you can earn incentives, like points and cash back if you have a rewards card.
If you’re exploring this option, consider opening a credit card with a 12, 18, or 24-month promotional interest period. That way, you can avoid paying interest on your purchases as long as you pay the balance in full before the zero-interest window ends.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) allows you to borrow against the equity you have in your home. Lenders generally grant a line of 75 to 95 percent of the value of your home minus the outstanding balance on your mortgage.
Most HELOCs have a ten-year draw period. During this term, you can access funds up to their credit limit, and you’ll also remit payment to cover a small portion of the principal on the outstanding balance and the interest. Once the draw period ends, you will have around 15 years to repay what you still owe, and any interest paid could be tax-deductible. However, be mindful that the monthly payment could be a bit higher because the amount you’re paying in principal is likely higher.
Home Equity Loan
Home equity loans are similar to HELOCs, but the funds are dispersed as a lump sum. The interest rates on these products are usually competitive, and you won’t have to refinance your first mortgage. It may take some time to qualify for a home equity loan, though, as you’ll have to have enough equity built up in your home to qualify for the amount you need to fund the project.
Repayment begins after you receive loan proceeds, and most loan terms are 20 years. The good news is the interest paid on a home equity loan used for home improvements could be tax-deductible.
Personal Loan/Home Improvement Loan
Unsecured personal loans allow you to borrow without putting your home up as collateral or tapping into your home’s equity. To qualify for a loan with competitive terms, you’ll need a good or excellent credit score and a steady source of income. Most come with a fixed interest rate and a loan term of five or seven years, which means your monthly payments for principal and interest could be rather steep.
Cash-Out Refinance
Cash-out refinances also allow you to tap into your home’s equity to access the cash you need. Lenders calculate your LTV ratio and extend loans for 80 to 85 percent of this amount minus your outstanding mortgage balance. The amount you borrow is rolled into your existing mortgage, and you will make payments on the new balance for up to 30 years.
To illustrate, if your home is worth $475,000 and you owe $375,000, you have equity of $100,000. With a cash-out refinance, you potentially qualify for a loan of $80,000 to $85,000, and your new loan amount will be $455,000 to $460,000.
Government Loan
You can use a Fannie Mae Homestyle or FHA 203k loan to fund your fixer-upper home renovation.
Fannie Mae Homestyle loans allow you to borrow up to 95 percent of your home’s after-renovation value. You’ll have to refinance your current mortgage and pay Private Mortgage Insurance (PMI) if your loan-to-value on the new mortgage exceeds 80 percent. The repayment period is 30 years, but expect higher interest rates than what you’d find with other construction loans.
FHA 203k loans are backed by the Federal Housing Administration (FHA) and are capped at 96.5 percent of your home’s after-renovation value. They require you to refinance your current mortgage, and the maximum loan term is 30 years. Homeowners with less-than-perfect credit can potentially qualify with a score as low as 580, but mortgage insurance must be paid upfront and for the entire loan term. Plus, the interest rates of FHA 203k loans are rather steep compared to other renovation loans.
Home Renovation Loan
As an alternative, you can use a company that specializes in helping you find loans specifically for home renovations.
How To Get a Loan to Finance Your Home Renovation
Before you start shopping for loan products, research offerings from several lenders to determine which best suits your needs. Inquire about qualification criteria so you’ll know if you need to improve your credit health or select another loan product to finance your renovation.
FAQs About Financing Your Home Renovation
Below are some frequently asked questions about financing your home renovation:
You can take out a home equity loan, HELOC, personal loan, cash-out refinance or use a credit card to secure the funds needed to renovate a house. Borrowing money from friends and relatives is also an option.
You can add renovation costs to a mortgage through construction loans, cash-out-refinance loans, FHA 203k loans, and Fannie Mae HomeStyle Loans.
You can use loan proceeds to finance renovations for a home you’re buying. Some government loans also allow you to use funds to finance renovations for a house you plan to purchase.
It depends on the type of property improvement project, but you want to consider how much you can afford in monthly payments.
