More Space or Greater Comfort? Financing Can Help
Did you buy a home that needs renovation? Or are you already living in a house that's ready for an upgrade? Either way, renovating can make your property more comfortable and better suited to your lifestyle and needs. But the question is: how do you pay for it?
If you’re planning a renovation, expect to spend a few thousand dollars for smaller updates to a much larger investment for structural work or extensive remodeling. Sometimes, paying the entire amount from savings may not be practical, and using a credit card can become expensive.
However, homeowners and buyers can use several financing options. The choice depends on the cost of the project, how much equity you have, whether you are purchasing or already own the home, and how you prefer to receive and repay the funds. In this article, you’ll explore some of the most popular ways to cover renovation costs.
1. Consider a Renovation Loan
This type of loan may be the right choice when you want to finance the property and the improvements together rather than arrange separate financing later.
Certain renovation mortgage programs enable eligible borrowers to include home renovation expenses in a purchase or refinance loan.
One such option is the HomeStyle Renovation mortgage offered through Fannie Mae, a government-sponsored enterprise that supports the U.S. mortgage market.
A renovation loan can be particularly useful when buying a property that needs work from the beginning. Instead of purchasing the home first and then looking for funds to renovate it, you may be able to address both needs through one financing structure.
You should understand that renovation loan programs have their own eligibility, property, contractor, appraisal, and project requirements. So make sure the scope of your renovation fits the program before choosing it.
2. Use a Home Equity Loan
Have you built substantial equity in your property? With a home equity loan (HELOAN), you may receive the funds you need without replacing your existing first mortgage.
A HELOAN allows you to borrow against the difference between the property’s value and the amount you still owe.
You’ll have the funds in the form of a lump sum, making things easier when you already know approximately how much your renovation will cost. Since the loan is secured against your property, it is important to ensure it fits comfortably within your budget.
3. Choose a HELOC for a Project With Changing Costs
We understand that not every home renovation has a predictable budget. Contractors may uncover additional work, and materials can change. Sometimes homeowners expand the project once construction begins.
A Home Equity Line of Credit (HELOC) works differently from a home equity loan. Instead of receiving one lump sum, you receive access to a credit line secured by your home equity and can generally draw funds as needed during the applicable draw period. A HELOC is a top choice for renovations completed in stages. You borrow when expenses arise rather than taking the entire amount at once.
But keep in mind that HELOC structures and rates can differ, so we recommend you review how the interest rate works, how long the draw period lasts, and how repayment will change later.
4. Fund Your Renovation With a Cash-Out Refinance
With a cash-out refinance, your existing home mortgage loan is replaced by a new, larger mortgage. After the old loan is paid off, the difference is available as cash. This cash can be used for purposes such as home renovation projects.
A cash-out refinance is a convenient option when a borrower wants renovation funds while also changing the terms of their current mortgage. But refinancing the entire mortgage solely to obtain renovation money is not automatically the best choice.
We recommend you compare your current interest rate with the rate on the new mortgage, consider closing costs, and look at how the new balance and loan term affect the total amount you may pay over time. If your existing mortgage already has favorable terms, you may consider a second-mortgage option.
5. Explore Personal Loans and Credit Cards
Personal loans and credit cards can provide easy access to funds without borrowing against your home. For a smaller home renovation project, that convenience may be useful.
However, unsecured borrowing can carry higher interest rates than financing backed by home equity. Credit cards can become particularly expensive when large renovation balances remain unpaid for a long period.
Before using either option, borrowers should compare the total borrowing cost rather than focusing only on how quickly you can access the money.
LBC Mortgage Helps You Choose the Renovation Financing
Renovating your home should start with a plan. Estimate the full cost, add room for unexpected expenses, and determine whether you need the money all at once or gradually. Then compare the interest rate, monthly payment, closing costs, repayment period, and total cost of each financing option.
At our company, we help homeowners and buyers compare different financing solutions based on their renovation goals, available equity, current mortgage, and overall financial situation. Turn to us, and our mortgage professionals will explain how each financing option works and help you evaluate the trade-offs. Contact LBC Mortgage to discuss which financing approach may fit your renovation plans.