Has pandemic quarantine left you realizing how badly your home needs upgrades? Are you considering taking out a home renovation loan so you can live in the house you’ve always dreamed of?
A home renovation can do so much more than give you a more attractive, stress-free space to live in. It can increase your resale value and save you money on repairs down the line. Your neighbors will also really appreciate the value your renovated home can add to the block!
Yet not all home renovation loan options are the same. They vary in terms of how you can use them as well as the fees involved. With a little homework, however, you can find the perfect home renovation loan for you.
Here are some you need to know about.
1. Fannie Mae Homestyle
Fannie Mae Homestyle loans are a particular type of construction loan. It’s insured by Fannie Mae, which is government-sponsored.
With a Fannie Mae loan, you can borrow up to 80% of the future value of your home without paying Private Mortgage Insurance (PMI.) You will only need to close once, so there’s only one set of documents and one set of closing costs.
Fannie Mae Homestyle Renovation mortgages are flexible and can be used for any number of repairs and upgrades. You may, for example, want to redo your kitchens and bathrooms, which will make your home much attractive and usable for you and your family. And prospective buyers will be drawn to it as well!
You can also use the money to build that Accessory Dwelling Unit (ADU) you’ve been dreaming of. These are versatile living spaces that are often used as in-law suites, college student apartments, or work studios.
Luxury home additions, such as an in-ground swimming pool or outdoor kitchens, are also great projects to use your Fannie Mae Homestyle loan for. Or you can use it for landscaping work like adding trees or a retaining wall. If you plan on doing do-it-yourself work on a one-unit property, you can use a Fannie Mae Homestyle Loan to finance it.
The amount you can borrow for a Fannie Mae Homestyle loan will depend upon your income and debts. Your lender will also think about what your home will be worth after renovations. Generally speaking, you’ll need a credit score of 620 or better.
If you’re worried about the total cost of the loan, know that you can include things like closing costs and fees in the loan itself.
2. Home Equity Loan (HELOC)
A Home Equity Line of Credit (HELOC) allows you to borrow against the equity you’ve built up in your home. In order to qualify, you’ll need to have available equity. Lenders will also look at your credit score, employment history, and monthly income.
You can take out a HELOC with a variable or fixed interest rate. With variable interest rates, your rate will change from month to month, while it holds steady with a fixed income rate.
With a HELOC, you can qualify for a low Annual Percentage Rate or APR. The interest you pay may also be tax-deductible if you’re using the money for home improvements.
While some loans require you to take out a fixed amount, a HELOC will allow you to borrow smaller amounts of cash as your renovations continue. If your project ends up costing less than you anticipated, you can work out a smaller monthly payment.
The timeline for paying off your HELOC can be changed depending upon how much you decide to borrow. It can also help you to raise your credit score provided that you’re making payments on time.
On the flip side, you will be using your home as collateral when you take out a HELOC. This means you risk going into foreclosure if you’re ever unable to pay off your loans. You’re also reducing the amount of equity you have in your home, which is a factor you want to weigh carefully before deciding on the loan.
3. Cash-Out Refinancing
A cash-out refinance for a home renovation will pay you the difference between your mortgage balance and your home’s value. Yet you’re limited to taking out up to 80 to 90% of the home’s value.
Cash-out refinancing generally offers lower interest rates than options such as a HELOC or a Home Equity Loan. And you can use the money for anything, so it may be a good way to pay off high-interest credit cards. In addition, you can write off the mortgage interest if you use it to make significant improvements in your home.
Like a HELOC, however, you’ll be using your home as collateral for a cash-out refinance. This comes with a risk of foreclosure if you were ever unable to make your payments. You’ll also need to pay PMI if you borrow more than 80% of your home’s value.
It’s important to remember that there are also closing costs associated with this type of loan. They are typically around 2-5% of the mortgage.
As with any other home renovation loan, it’s important to weigh the pros and cons carefully before making a decision. If you’re confident in your home’s ability to increase in value, as well as your ability to spend the funds wisely, you could be on your way to a smart move!
4. Plenti Renovation Loan
The renovation loans offered by Plenti have unique benefits. You can borrow anywhere from $5,000 to $50,000. There’s also a flexible term of 1 to 7 years, so you know you’ll have your loan paid off before the decade is through.
It’s also possible to repay your loan early with Plenti. You will save on interest and not have to worry about any ongoing fees.
Maybe you just know that a new kitchen or bath would make life many times easier for your family. Or you plan to sell in a few years and you’re confident that the right renovations will get you your money back and then some.
If so, it’s time to research loans such as those offered by Plenti and get rolling on the next chapter of homeownership.
5. FHA 203 Loan
An FHA 203 Loan is a government-insured mortgage that will allow you to take out a loan for a home purchase or home renovation. With this type of loan, you can take out a loan for either minimum repairs or extensive work.
With the loan for minimal repairs, there is a cap of $35,0000. With the loan for extensive work, there is no cap, but you must spend a minimum of $5,000.
One benefit of an FHA 203 loan is that there is a low downpayment required. You also have a lower minimum credit score than is required for other types of loans. These loans are also obtainable for those with higher incomes and lower credit scores.
It’s also possible to get reasonable mortgage insurance (PMI) with an FHA 203 loan. This is true even if you have poor credit.
You can use an FHA 203 loan on most types of homes, but it must be your primary residence. You’ll also be paying higher total mortgage insurance costs. Your home will also be required to meet minimal health and safety standards.
If you opt for a loan with a minimal downpayment, you’ll be stuck with personal mortgage insurance throughout the life of the loan.
Deciding Between Home Renovation Loan Options
Renovating your home is an exciting time. You can choose the features you’ve always wanted in a living space, and really begin to make it yours. It’s also nice to know you’ll have to worry less about structural issues or smaller repairs.
Taking out a loan, however, isn’t something you should do on a whim. There are a number of factors you should take into account before deciding on a loan type.
For example, what is your credit score, and what kind of loan can you qualify for? And what about your home value? Do you have enough equity built up to make the renovation worth it?
You’ll also need to consider how your future budget will be affected. What is the average interest rate on a home improvement loan? Will you be able to pay the additional fee every month?
It’s important to crunch the numbers and weigh your options carefully. You may want to enlist the help of a financial professional before making a final decision.
With so many home renovation options available, it’s critical to choose the right one. With a little homework and good timing, you could be on your way to the home of your dreams in no time.
Don’t stop getting smart about your home and finances now. For more great advice, read our blog today.