Home Equity Line of Credit

Financing Your Home Renovation

If done right, home improvements can increase the value of your home and add equity to your property. The less you spend paying for home remodeling, the higher your return on investment will be. Home remodeling can take a big chunk of your income. Unless you have money you’ve set aside, you’ll have to finance the improvements. The good news is, there are plenty of relatively low-cost ways to finance home renovations. As long as you make a budget that fits your lifestyle and doesn’t try to turn a one-story ranch into an Italian Renaissance palazzo, you should be A-Okay.

There are many options when financing your home renovation.

The most affordable financing is normally backed by your home: FHA 203(k) refinancing, cash-out refinancing, home equity loans, and home equity lines of credit (HELOC). 

For smaller amounts, or for those who might not qualify for a refi of their mortgage, personal loans or credit cards might be a better choice. You could even combine these options; for instance, use a zero-interest credit card for 18 months and then pay it off with a HELOC, home equity or personal loan.

A cash-out mortage refinance is a great way to pay for home renovations.

A cash-out refinance means you refinance the existing mortgage for more than the current outstanding balance. You then can keep the difference between the new and old loans. If you have a big amount of equity in your home, a cash-out refinance lets you free up a large sum. However, if you don’t have enough equity or your credit score leaves much to be desired,  you may find it difficult to qualify for a sizable loan. If you don’t need a lot of cash, this option can be very expensive. In theory, cash-out refinancing is available to people with credit scores as low as 620, but that’s pretty much the cut-off. The truth is, many lenders set their minimums around 640.

Home equity loans and lines of credit (HELOCs) are both mortgages, secured by your property.

They can also be referred to as “second mortgages” since usually there’s already a first mortgage against the property, and the new one is the additional one. Second mortgages are riskier to mortgage lenders, so their interest rates can be higher. The amount of the first mortgage plus the amount of the second mortgage, divided by the home’s appraised value is called the combined loan-to-value, or CLTV. A home equity loan is a fixed-rate loan that is safe by your house. In many cases, lenders allow a CLTV of up to 80%. In other words, you can borrow up to 80 percent of your home’s market value minus what you still owe on the mortgage. Home equity loans are normally approved faster than cash-out refinances. They also tend to have lower closing costs.

What method you choose when remodeling your home depends solely on your financial situation. If you still aren’t sure about which option to choose, go to your bank or mortgage lender and ask any questions you have – after all, they are the experts! Once you have your budget in hand, come to Home Remedy to see some amazing ideas on how to renovate and remodel your home. We’d be more than happy to help you with ideas that can stick to your budget!