Home revocations are expensive. Fortunately, there are programs available today that make them more affordable. Tapping into your home’s equity, you can invest the funds right back into your home with one of the many home renovation loans available today.
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Keep reading to learn which program may be best for you.
The Home Equity Loan (Line of Credit)
Most people think of a home equity loan or line of credit for home renovations. This is probably the simplest loan program since it’s a second lien on the property. You can typically borrow up to 85% of the home’s current value with either loan option.
The home equity loan is a fixed second loan that provides you with a lump sum of funds to make the renovations. Upon receiving the loan, you start making principal and interest payments right away on the full amount. Most home equity loans have a term of 20 years and a fixed interest rate. You receive the funds once and that’s it. The home equity loan is good for projects that have a set budget and you will only need one time.
The home equity line of credit is a revolving loan. It works like a credit card. You get a credit limit to spend and access to it. You don’t have to draw any funds out right away. If you do draw funds out, you pay interest only on those funds. You can choose to make principal payments on top of the interest, but it’s not required. If you do pay the principal back, you can reuse the funds for up to 10 years.
After the 10-year draw period ends, you must make principal and interest payments for the next 20 years. You cannot withdraw any funds once the draw period ends. The HELOC is good for borrowers that don’t have a fixed budget in mind for the home renovations or that will need repeated access to the funds.
Refinance Your First Mortgage
You can also wrap all of your needs into one loan with the cash-out refinance. If you don’t have a great interest rate on your first loan right now, taking a cash-out refinance can simplify things. You borrow as much as you need to pay off your existing mortgage, plus any cash you need for home renovations. You can typically borrow up to 80% of the home’s value with a cash-out refinance, if you qualify.
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Cash out refinances work like the home equity loan. You receive your equity in one lump sum. You can do what you wish with the funds. You’ll pay principal and interest payments on the amount borrowed right away. The interest rate on a cash-out refinance may be a little higher due to the risk the lender takes, so make sure you pay careful attention to the mortgage payment amount.
Take Out a Rehab Loan
There are several rehab loans that you can take out to renovate your home too:
- FHA 203K – This government loan has flexible guidelines like the standard FHA loan. It provides you with funds to refinance your existing loan plus the cost of home renovations on your primary residence. You can borrow up to 110% of the home’s after-improved value for home renovations. You’ll need a 3.5% down payment and minimum 580 credit score. You can opt for the Streamline FHA 203K that allows up to $35,000 in renovations with no structural changes or the full FHA 203K with stricter requirements, but that doesn’t have a limit on the dollar amount or type of renovations.
- HomeStyle Loan – The Fannie Mae HomeStyle Loan is the conventional version of the rehab loan. You’ll need a slightly higher credit score of 620 and at least a 3% down payment. Conventional loans have slightly stricter underwriting guidelines, but the HomeStyle Loan allows you to renovate your primary, investment, or second home. You can borrow up to $484,350 with the renovations taking up no more than 75% of the after-repaired home value.
The best home rehab loan for you depends on your circumstances. Do you like your current first mortgage? If you’d rather leave it untouched, you’ll need to take out a home equity loan or HELOC. If you aren’t attached to your first mortgage and don’t mind refinancing it, any of the rehab loans or the cash-out refinance can be a good option. Think about your qualifying factors and if you need the FHA loan for its flexible guidelines. If you qualify for conventional financing, your best bet is to try the cash-out refinance or Fannie Mae HomeStyle loan.