How To Get A Loan To Remodel Your Home
Mortgages are one thing, but what happens if the house you’re living in or moving into isn’t turn-key? Learn everything you need to know about how to obtain a loan to remodel your home before or after you buy.
Buying a Fixer-Upper That Needs Remodeling
If you’re buying a home for $200,000, but it needs an additional $100,000 worth of repairs, what do you do? A typical mortgage is only going to cover the cost of the home, so any additional fixer-upper money is going to have to come from a different source.
While homeowners are able to apply for a home equity loan, if you’re buying your first home, you won’t technically have any equity to borrow against yet. That’s why there are construction loans that you can apply for to make up the difference in your fixer upper. Here are a couple kinds:
- FHA 203K Renovation Loan – This loan is for homebuyers who need to make structural and cosmetic renovations to their homes. Among many of the positives, this loan serves as your mortgage and loan money to renovate a home so you’ll only have to worry about one payment, one rate, one round of closing costs, and one process of going through the paperwork and contracts. These loans typically don’t require high credit scores either.
- FHA 203K Streamline [203K(s)] – Similar to the FHA 203K Renovation Loan, this one differs because it only provides loan money for cosmetic renovations.
- HomeStyle® Loans – This type of loan is available for first-time buyers or those who already own—meaning you can roll your renovation loan and mortgage into one. There are generally more limitations to obtain this type of loan.
Remodeling Your Home Down the Road
If you own a home and are ready to remodel, there are a number of options to help you obtain a loan.
- Home Equity Line of Credit – For those who have equity (own a home), you can apply for a Home Equity Line of Credit. Essentially, you’re using your home as collateral for the determined loan amount. This type of loan can also be compared to a credit card because it allows you to use a certain maximum dollar amount whenever you need it. These loans are tax-deductible and often come with low interest rates.
- Home Equity Loan – Also known as a second mortgage, these loans are obtained in a lump sum. Then, they’re paid off gradually like a regular loan. Generallly, Home Equity Loans are easier than refinancing (for loans like FHAs), cheaper than lines of credit (interest-wise), and have tax-deductible benefits.
- Refinancing – FHAs and HomeStyle loans are a refinancing option for people who already own a home, have a mortgage, and want to renovate. You can refinance your mortgage for a new fixed rate and obtain a renovation loan all in one.
Benefits of Fixing Up a Home
Renovating a home is a great way to add equity. Minor kitchen remodeling adds an average of about 87% of the cost of the project to your home’s value. If you have a $200,000 home and spend $18,000 on a kitchen remodel (the average cost of a kitchen remodel), you can expect to add about $15,000 in equity to your home—making the new value of your home $215,000. While this only translates to profit in your pocket if you sell your home, the added equity will allow you to get higher loan amount approvals in the future.