Whether you’ve lived in your home for years, or are planning on becoming a homeowner, you may have big renovation projects in mind. The idea of customizing your home with necessary updates, or to better fit your style and taste, can be both exciting and daunting.
Undertaking repairs on your home can be a lot. If you do not have enough savings to cover everything you’d like to, there are various financing options to choose from. Here are some you might consider:
Home Equity Loan
A home equity loan allows homeowners to take out a loan against the equity built up in their property. Let us imagine your home is valued at $300,000 and you have $250,000 left to pay off on your primary mortgage loan. You would have $50,000 you could borrow against.
The biggest disadvantage homeowners must consider before committing to a home equity loan is the risk of losing the home if you are not able to make the loan payments. This risk will occur with any loan type that borrows against the value of your home.
Another option you have is a personal loan. Getting a personal loan for financing a home renovation means that you borrow money at a fixed rate of interest and pay it back monthly for the specified term. The monthly payments will not fluctuate because the interest rate remains the same throughout the term of the loan. Personal loans have higher interest rates than a mortgage or home equity loans because they tend to be unsecured loans.
Although several personal loans do not come with any fees, some do have application fees and origination fees. For example, personal loans from Marcus by Goldman Sachs are popular with consumers due to the simple fact that these loans come without any fees. There are no origination fees, application fees, or prepayment fees.
Also, it is good to know that when you pre-qualify for a personal loan, a lender can show you your best interest rate and monthly payment amount without needing to do a hard inquiry on your credit report.
FHA 203(k) Loan
FHA-insured loans allow you to refinance your first mortgage, consolidate it with home improvement costs, and roll it all into a new mortgage. This type of loan is based on the improved value of your home after repairs. Since your home is considered to be worth more, the equity and amount you can borrow are both greater.
There are two types of 203k loan products you can choose from: the Limited 203k and the Standard 203k. The 203(k) limited loan provides up to $35,000 for renovations, but major structural repairs are not eligible. For a 203(k) standard loan, renovations must cost at least $5,000, and major structural repairs are eligible. Borrowers using a 203(k) standard loan must hire a HUD consultant to oversee the renovation process.
Fannie Mae Loan
A Fannie Mae Loan is similar to an FHA 203(k) loan, but it requires a down payment of 5% or greater. Additionally, there is no limit to the renovations you can perform, as long as everything is permanently affixed and adds value to the home.
Line of Credit
Another option for funding your home repairs is using a line of credit. If you already have equity in your property, you can refinance to a line of credit loan. A line of credit works as a revolving loan that you can access whenever you want. What is a revolving loan you may be asking yourself? It’s a loan that allows borrowers to obtain a loan with the flexibility to drawdown, repay, and redraw loans advanced to it. Additionally, a line of credit can be used at once or stage by stage in your home renovation process. For example, you may want to use a line of credit to pay vendors as you go.
When you’re considering the different options available to help finance your home improvements, there isn’t a one-size-fits-all loan. Take your time to explore the options available and find which one best fits your needs.
Guest Post by Consumer Advocate