Construction & Renovation Loans:

Is a renovation loan right for me?

If you want to renovate or remodel your home but don’t have the cash to pay for it out of pocket, home renovation loans are a smart way to get your home improvement project funded and on track. Whether you’re adding a new room to your home, redoing your kitchen, or replacing your roof, home renovation loans can help you finance the cost of your upgrades.

There are several types of home renovation loans to choose from. Many of them require a minimum credit score and either a minimum amount of home equity in your home or a minimum down payment.

To determine if a home renovation loan is right for you, ask yourself these four questions:

Question 1: Will the remodeling be worth it?

Have a clear picture of what changes you want to make to your home. Do your research and get a good idea of what it will cost. Will the renovation increase your home’s value? If so, you may recuperate the renovation loan costs when you sell your home. If it will have little impact on your home’s value, then the project – and taking out a loan – may not be worth it.

Question 2: Can you handle another loan payment?

Remember, the renovation loan is not tucked into your monthly mortgage payment. It will become an additional monthly bill on top of your current mortgage payment. Remember that you’ll be paying on the loan long after the project is finished. So, you need to be sure that this is what you want and that you’re prepared to make the payments.

Question 3: How much will you need to borrow?

When determining how much you need to borrow for your home renovation, make sure your factor in labor costs, inspection fees, permits, and architectural or engineering services. The materials used are just the beginning.

Question 4: Can you qualify for a lower interest rate?

Many times, your interest rate is impacted by your credit score and the amount of equity you have in your home. You can calculate your equity by subtracting how much you still owe on your mortgage from your home’s current market value. The higher your credit score and the greater the equity you have often make lower interest rates available to you. Use the LoanGIANT Loan Calculator to estimate your down payment amount, interest rate, and payment amounts. This will give you an idea of what to expect before you take out a home renovation loan.

Remember: A home renovation loan is not a home equity loan.

You may be saying to yourself, “this sounds a lot like a home equity loan.” Although your home equity plays an important role in a home renovation loan, home equity loans and home renovation loans are not the same. And the difference is important. First, interest rates for a renovation loan are typically higher than interest rates for a home equity loan. Second, the interest paid on a renovation loan can’t be claimed as a tax deduction.

Two common renovation loans:

Fannie Mae® HomeStyle® renovation loan The HomeStyle renovation loan offers loan amounts up to 75% of the home plus renovation costs. This loan can be used for improvements on your current home or for repairs on a home you are purchasing. Requirements:

• A credit score of at least 720

• A certified contractor must prepare a cost estimate

• Funds must go into an escrow account rather than directly to you

FHA 203(k) loan

It’s easy to see the appeal of the 203(k) loan. You can qualify with a lower credit score, plus it offers a lower minimum down payment and lower interest rate. Like the HomeStyle renovation loan, the funds go into an escrow account. Requirements:

• Property must meet the government energy efficiency and structural standards

• Borrower must use a qualified 203(k) loan consultant

• Borrower must adhere to certain limitations on reselling the home

Other options

Ask your LoanGIANT Loan Consultant about special federal programs for home renovations on Title I loans and on energy efficient mortgages. These may work for you. You can also opt for a cash-out refinance loan on your home and use the cash payout to fund your renovation work.

At LoanGIANT, we bring years of experience dealing with every kind of home renovation financing in the market. We know how to navigate all the government programs, plus we have an expansive portfolio of loan options to meet your needs. We apply all that knowledge with one goal: To help you attain the home of your dreams in a way that truly works for your unique situation.

To get started on your home renovation, contact a LoanGIANT Loan Consultant today.

How do home renovation loans work?

You fell in love with your new home, and then you lived in it. Over time, things have started to look worn and frayed. The kitchen no longer excites you the way it used to. You wake up one day and your bathroom feels cramped and outdated. You keep catching yourself daydreaming about all the ways you could make your home feel new again. You don’t want to sell your home, but you want to make some changes. Sound familiar? Fear not. It’s completely normal.

Whether you bought and fell in love with your home but feel it needs some updates or you’ve just purchased a new home that has a ton of potential but needs some work to make it your own, home renovations are the answer. However, they can be costly.

If it’s time for you to look into a home renovation but you don’t have the cash in hand to pay out of pocket, you can use your home itself to make it happen. There are three popular ways to use the equity you’ve built in your home to finance a renovation project.

1. Cash-out refinance loan

   A cash-out refinance lets you replace your existing mortgage with a new home loan based on the amount you still owe on your home. In short, you take your original home loan amount, subtract the money you’ve paid so far against the principal, and then start a new mortgage on the remaining amount. The difference between the original amount and the new amount comes to you as a lump cash payment you can use to fund your renovation, consolidate your debt, or fulfill other financial needs.

   NOTE: You’ll have to pay closing costs again and the term of the mortgage starts all over. It could be another 15, 20, or 30 years. Make sure you don’t use the cash payment to run up debt you won’t be able to pay off.

2. Home equity loan

   If you don’t want to start your mortgage term all over again and you can handle an additional monthly loan payment, a home equity loan may be the best option for you.

   A home equity loan is a separate loan based on the equity you have built up on your home. Typically, you can borrow up to 80% of that amount. Home equity loans are sometimes referred to as a “second mortgage,” as they become a second monthly payment. You may have up to 15 years to pay this loan off and many lenders cover the closing costs for you.

   NOTE: You’ll need to pay closing costs and fees, which can range from 2% to 5% of your loan amount. You’ll also have two mortgage payments instead of one, so be prepared for that extra home-related payment.

3. Home equity line of credit loan

   A home equity line of credit (HELOC) gives you the greatest flexibility. Essentially, a HELOC works like a credit card that borrows against the equity of your home. Once you set up your line of credit, you don’t have to begin using it right away. You can also use it in whichever way you see fit. Fund a renovation project or pay for a vacation – it’s all up to you. Plus, when you pay back charges, the money returns to your equity – making it possible for another even larger line of credit.

   NOTE: Interest rates vary and lines of credit usually come with annual fees.

Ways to plan ahead and include renovation in your first mortgage

Some people purchase a home with specific upgrades or remodeling in already mind. In these cases, you can fold renovation costs into your mortgage at purchase. Here are three of the most common ways to do that.

1. FHA 203(k) loans

   These mortgages are designed for first-time homebuyers. They allow you to add expected renovation costs to your mortgage loan principal. These loans require a down payment as low as 3.5% but give you only six months to get the work done. You’re required to use a licensed contractor for renovations, so the money cannot be applied to DIY projects.

2. Fannie Mae® HomeStyle® renovation loan

   The HomeStyle renovation loan is similar to the 203(k) loan but it gives you more freedom with how you spend it. The 203(k) Loan can be used only for non-luxury projects, while the HomeStyle loan can be used to add a pool, a hot tub, or just about anything else. These loans require a minimum 5% down payment.

   Requirements to get this loan:

   • A credit score of at least 720

   • A certified contractor must prepare a cost estimate

   • Funds must go into an escrow account rather than directly to you

Choose the loan that works best for you

Now that you have an overview of how you can finance your home renovation, the next step is to determine which works best for you. LoanGIANT’s Loan Consultants are standing by ready to help you make your choice. They’ll show you the pros and cons of each option and the cost in dollars and cents. Contact a LoanGIANT Loan Consultant now to start turning your home into your dream home.