Types of home improvement loans
Is your home looking a little, dare we say, drab? After years of daily use, even the house of your dreams can start to wear down. The right home improvement project can spruce up every corner of your home, from the kitchen to the master bedroom.
It’s easy to cook up renovation plans, but it’s another thing entirely to fund them. That’s where home improvement financing, like personal loans or home equity lines of credit (HELOC), can help. You have more home improvement loan options than you probably realize, so let’s take a look at the different ways to finance your next renovation project.
Get liquid assets with a cash-out refinance
Every time you make your monthly mortgage payment, you’re putting equity into your home. And you can tap into that equity through different types of home loans, including a cash-out refinance. When you use this type of home loan, you’re essentially trading your original mortgage in for one with a higher total loan amount. That may sound like a raw deal, but with cash-out refinancing, your lender pays out the difference between the two mortgages in cash. You can then turn around and spend that cash on any renovations you like.
The downside to this approach is that you’ll extend the amortization schedule of your loan since you’re basically starting with a fresh mortgage. You will also need to pay the closing costs that would come with any mortgage refinance, as well as private mortgage insurance (PMI) in some cases.
All that being said, your lender might give you a lower interest rate on your cash-out refi than you had with your original mortgage. So, you could be looking at lower monthly payments in addition to the liquid assets needed to take on a home improvement project. That’s a win-win.
Plus, using a cash-out refi to invest in home improvements will likely increase the value of your house. That’s great if you think you might sell your home sometime down the line. But even if you don’t, increasing the value of your home would also raise your equity, giving you more value for your asset.
Take out a home equity loan
Like a cash-out refi, a home equity loan will land you a lump-sum payment to help you finance home remodeling and repairs. Home equity loans aren’t a straight-up mortgage swap, though. When you use this type of home improvement loan, you’re basically taking out a second mortgage. And that means you’ll need to make payments on both your original financing agreement and your home equity loan. Not everyone will have the financial flexibility to balance those costs over the long run.
If you can manage it, though, a home equity installment loan (HEIL) can net you the money you need to make necessary repairs to your house or finally get around to those renovation projects you keep putting off. Your mortgage lender should be able to give you guidance based on your financial situation and the status of your home loan.
Open a home equity line of credit
Home equity line of credit (HELOC) is similar to a home equity loan in some respects, but it differs in some key ways. Like a home equity loan, a HELOC mortgage uses the equity you’ve built up to fund a wide variety of expenses, including home improvement projects. The most notable difference between the two is that with a standard home equity loan, you’re getting a lump-sum payment up front. That’s not the case with a HELOC mortgage. Instead, you’ll have a revolving credit line you can borrow against as you see fit.
What does that mean for homeowners? Let’s say you’d like to renovate parts of your home, but you’re not sure how much it’ll cost or exactly what jobs you want to prioritize. Taking out a massive loan for a fixed amount might not make much sense in that scenario. Opening up a line of credit, on the other hand, would let you focus on specific repairs or upgrades and then pay as you go. You’ll never take out more money than you need to whip your house into shape.
Keep in mind that, unlike home equity loans, not all HELOC mortgages come with fixed interest rates. Similar to adjustable rate mortgages, these home repair loans often use variable interest rates, so your payments may fluctuate over time. That’s not always the case, though. Your lender may offer HELOCs that allow you to “fix” the interest rate when drawing a single large amount from your line of credit. The remainder of your unused funds would continue to use a variable interest rate in that scenario.
Look into a reverse mortgage
Homeowners typically use reverse mortgages to help fund retirement, covering necessary living expenses by cashing in on home equity that’s built up over the years. But, you could also use those resources to pay for home improvement projects. Reverse mortgages give you a few different payment options to consider, from monthly deposits to an ongoing line of credit.*
You also don’t need to repay your reverse mortgage until you either sell your house or transfer the property to another person. And yes, in some situations, that might mean you never repay the home renovation loan. Rest assured, someone else will, but it won’t necessarily be you.
Sounds pretty great, right? Here’s the catch (well, one of them, anyway): Reverse mortgages aren’t available to everyone. There are several qualifications you first need to meet, including your age, the amount of equity you have in your home and the type of residence you own. If you’re not near or at the age of retirement, then this isn’t the right home remodel loan for you.
Take advantage of FHA 203k renovation loans
FHA 203k renovation loans are a bit of a hidden secret in the mortgage lending world, but they really shouldn’t be. These government-insured loans can be huge assets to both new and long-time homeowners who want to give their house a facelift. Borrowers can take out an FHA 203k loan when buying a house or refinancing an existing mortgage to put that money toward necessary home repairs.
“Necessary” is the key word there, though. The Federal Housing Administration (FHA) will only sign off on home renovation loans for certain projects.** Anything the FHA deems an excessive luxury, like adding a bar to your basement or building a swimming pool, could get nixed. But, common home improvement tasks like revamping your kitchen, rehabbing your master bathroom, installing hardwood floors or repairing a leaky roof are often covered by these home remodeling loans.
Keep in mind that there are two types of FHA 203k renovation loans to consider. The standard or “full” version will net you more money and cover even significant structural repairs. The “limited” 203k loan, on the other hand, provides no more than $35,000, and will not be approved for major repair jobs.
Turn to FHA Title 1 loans
If FHA 203k renovation loans are underused, then FHA Title 1 loans are basically sitting and collecting dust. Very few homeowners take advantage of these renovation loans, largely because most people don’t even know they exist. As with other FHA loans, the government agency doesn’t provide financing itself — that comes from a separate lender. Instead, the FHA insures up to 90% of the loan amount so lenders can mitigate some of their risk.
FHA Title 1 loans tend to be much smaller than other types of home improvement financing, with loan amounts capped at $25,000 on single-family homes. With that in mind, you’re going to need to set your renovation sights a little lower if you go this route.
Check out Fannie and Freddie’s renovation mortgages
If you have a Fannie Mae-owned mortgage, you might be able to take advantage of HomeStyle®, the government-sponsored enterprise’s home renovation loan program. You still need your lender to sign off on the renovation loan, of course, but HomeStyle® can be a pretty affordable way to finance repairs to your home. Not to be outdone, Freddie Mac has a renovation mortgage program of its own called CHOICERenovation®. Both Freddie Mac and Fannie Mae’s lending terms are pretty flexible. In some cases, applicants can take advantage of loan-to-value (LTV) options as high as 97%.
Explore personal loans for home improvement
When you’ve exhausted your home equity options, it might be time to turn to personal loans. A lot of people — including new homeowners who haven’t had time to build up equity — use personal loans to fund their home improvement projects. Some mortgage lenders offer this type of financing, so you don’t necessarily need to work with a new face to get the money you need to remodel your home.
When you sit down to look at what personal loan options are available, you’ll likely come across two different varieties: unsecured and secured loans. Unsecured means you don’t need to put up any collateral that could later be repossessed if you fall behind on your payments. As a result, lenders will often attach higher interest rates to offset their added risk. Secured loans, meanwhile, do require collateral. If you don’t keep up with your monthly payments, creditors could have the legal right to repossess your assets to recoup your unpaid debt.
Like the other home improvement loans we’ve discussed, personal loans will require you to submit to a review of your finances. Often, that just means running a credit report, though. Lenders in these scenarios are unlikely to dig up information regarding your employment history, bank accounts or non-liquid assets.
Home renovations can get pretty expensive, and scrounging up enough money to fund these projects could take a very long time for homeowners. Home improvement loans provide the financing you need to make necessary repairs, revamp living areas or possibly even build new additions onto your house.
With so many options to choose from, there’s really no reason to hold off on that home improvement project any longer. Check out all of your loan options and find the one that suits you best.
*Must meet financial assessment requirements and be responsible for monthly property charges such as property tax and homeowner’s insurance or could be subject to foreclosure. Applicant must qualify based off age, equity, current balances and other various factors. Restrictions may apply. This material is not provided by, nor was it approved by the Department of Housing & Urban Development (HUD), the Federal Housing Administration (FHA), or any other government agencies. Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency. Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster here or call (800) 569-4287.
**Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
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