Choosing Financing for a Home Renovation Project

Financing Your Home Renovation Project Is as Important as Planning the Project Itself. Follow These Tips to Figure Out the Best Option for Financing Your Home Renovation.

Financing a Home Renovation Project

Home renovations are a great way to invest in a property and make your money work for you while enjoying the benefits of the improved home. When rates are low, when you are thinking about moving and want to increase your home’s value to match or lead your neighborhood, or when you really need to fix up your home, a major renovation can be the perfect choice. However, a good renovation is expensive, so you need to think about how to finance your home renovation project.

This first thing to think about when you consider your financing options is why you are renovating. Beyond the advantages discussed above, think about exactly what you want to change and why that needs to be improved or updated. This is an important step to give you an idea of how much you want to spend and how much value it will add to the home. Combined with your own budgetary options and constraints, these numbers are essential for helping you figure out exactly what kind of financing you can afford.

There are a number of more and less reasonable ways of financing a home renovation project. House flippers even put all their costs on credit cards! But for the average, risk-averse homeowner, three of the most common options are: 1) Government loans, credits, and incentives; 2) Home equity loans; and 3) Refinancing your mortgage.

Government loans and incentives come in all shapes and sizes depending on where you live, your current situation, your local government’s stance, and a range of other variables. One of the most common ways to access this is by getting a loan from a private lender that has the government’s insurance backing, which encourages lenders to loan money to borrowers who don’t have the home equity for a more typical loan. You can also get state and federal tax credits for certain types of renovations, such as those that make an older home more energy efficient or upgrade it to use solar power. These are complex and smaller, but if you can find one that applies to your plans, it may help.

Home equity lines of credit (HELOCs) are just typical bank loans that use your home as collateral. Their rates are based off a specific rate that relates to the federal funds rate. If you have equity in your home and good credit, you can get a decent rate from these loans, especially if you don’t want to borrow a large portion of your home’s equity. They also offer a bit of flexibility because you can pay off what you owe at any time and then not carry a balance on your line of credit. This is useful if rates seem to be spiking and you don’t want to pay higher interest. You have a range of options for the life of the loan based on your goals, but the result is the same with all of them. If you can’t meet payments, the bank forecloses on your home.

Often called a “cash out” refinance loan, this is the most reasonable option for the average homeowner today. With this kind of mortgage, you are able to access more money than there is equity in your home. Your home remains the collateral for the loan and you continue working with the same lender that gave you the original mortgage that allowed you to buy the house in the first place. The refinancing process allows you to obtain a lower interest rate if the market is more welcoming to loans, and gives you the cash you need for the renovations. Typically, homeowners also have access to better interest rates with this kind of refinancing than with a HELOC because you’re borrowing from the same bank and not subject to the same lock-step procedures used for home equity loans.

These are two crucial advantages for most homeowners. Not only does it mean that you can actually get enough cash to pay for your renovations even if you still owe money on the house. It also enables you to access financing at lower interest rates in most cases. You just need to be sure you pay attention to your rates because if the lender wants you to refinance at a higher mortgage rate, you will be losing a lot of money on the amount you still owe on the house.

Financing home renovations projects can be difficult and stressful. It’s important to get good financial advice from the very beginning, and follow the tips and details outlined above to ensure you find the right financing option for your budget, current financial situation, and renovation goals. You are probably going to want to refinance your mortgage with your original lender, but it’s worth taking the time to shop around and do the math before you decide.