Financing Options for Additions and Major Home Renovations
Additions and major home renovation projects make your house feel more like a home and potentially boost its functionality and resale value. But unless you are in a position to pay cash for renovations, you’ll be looking to finance them in the form of a loan. There are many different options you should consider based on the scope of your project, amount you are looking to borrow and the equity available in your home. Here we’ll discuss three of the more common ones that are available to borrowers today.
The Cash-Out Refinance Mortgage
The first type of loan to consider is a cash-out refinance mortgage. This loan is a good option if you can meet the following criteria: 1) your current mortgage rate is above market rates; 2) you want to incorporate your project costs into a mortgage; and 3) you need to borrow more than you owe on your current mortgage. This type of loan generally carries a lower interest rate than a home equity line of credit, and you can obtain a long-term, fixed-interest rate of up to 30 years, which helps lower your monthly payment. Keep in mind that there are typically closing costs involved with refinancing. While this is a great loan to help pay for large renovation projects, it may not be the best option if you are planning a smaller one.
Home Equity Line of Credit
If the rate on your current mortgage is lower than market rates, a cash-out refinance may not be the best option because you’ll be refinancing your mortgage at a higher rate. In this scenario, a home equity line of credit could be a better way to go. Because a home equity line of credit is secured by the equity in your home, rates will still be lower than most other financing options. In addition, there are no closing costs, which lower the overall costs as compared to a mortgage. A home equity line of credit also enables you to write checks for funds as needed throughout your renovation project. As a result, you will only pay interest on funds as they are used.
The first two options are best when you have enough equity in your home in its current “as is” state. If you don’t fall into that category, a construction-renovation loan could be the best option. With this loan, the “as completed” appraised value of your home is used in order to determine your maximum loan amount. This type of program will require the involvement of a general contractor and a full set of plans and specifications outlining the scope of the project. Any existing liens on the property will be paid off at the time of settlement, and the funds designated toward improvements will be disbursed according to a draw schedule. You will only pay interest on the funds borrowed until the project is complete. At that time, the loan will convert to a fully-amortizing mortgage.
Want to Learn More About Financing Options?
If you would like to learn more about options for financing your renovation project, contact one of our Mortgage Experts by calling us at (877) 773-6605 or send us a message today.