A great way to increase the value of your home is to renovate, which simultaneously makes it a more pleasant space for living. Most homeowners spend relatively modest amounts each year to fix small things and address immediate problems. Major renovations, however, involve a lot more time and money.
If you have thought about renovating, you may have been discouraged by the seemingly few financing options available. However, you may be unknowingly overlooking one of the key options that could make a major project accessible. Whether you are trying to create more space, modernize, or change the general flow, the following options may be available to help you fund the renovation.
1. Home equity loan
A home equity loan lets you borrow against the equity that you have amassed in your house. This option is available if you have at least 20 percent equity in the home. Generally, people use this option when they need a large sum of money. Essentially, you are taking out a second mortgage. You will likely have slightly higher interest rates than with the primary loan, but the rates are still low, and the interest is often deductible.
You will need to qualify for the loan according to the requirements of the lender and pay various fees related to processing. Note that the typical term for a home equity loan is 15 years or less and that you will need to pay off the balance if you decide to sell your home. These loans also sometimes have early payoff fees. Also, you are putting your home up as collateral, so make sure you can make the monthly payments.
2. HUD Title 1 loan
If you do not have enough equity in your home yet, you may be able to get the Department of Housing and Urban Development (HUD) Title 1 Property Improvement Loan. These loans are made by traditional lenders, but the federal government backs them to make them easier to secure.
To qualify, there are maximums in terms of both income and savings. The program provides loans up to $25,000 for a wide range of different types of projects and you can take up to 20 years to repay it. You should note that the interest rates, terms, and requirements vary between lenders, so it can be helpful to shop around. If you want more than $7,500, you will need to put your home up as collateral.
3. Home equity line of credit (HELOC)
Slightly different from a home equity loan is the home equity line of credit, which functions largely like a credit card. You can borrow up to $25,000 provided you have at least 20 percent equity in your home. This option is ideal for making a series of smaller improvements. You pay on what you borrow as you go, which can limit the amount of interest you end up paying.
While this option sounds less formal than an actual loan, you will still need to meet stringent requirements from a lender. Lines of credit tend to be more complicated, too, especially if there are ongoing fees or a variable interest rate, which is typical. Just as with the loan, you can lose your home if you fall behind on payments.
4. Refinancing
If you have a really large project, you could actually consider a complete refinance. You are likely familiar with the idea of refinancing to secure a lower interest rate. Another option is a cash-out refi, which means you replace your old loan with a new, larger one. The new loan pays off your mortgage and associated fees while leaving you with a bunch of cash to do some remodeling work.
However, you need to keep in mind that you are essentially spending the wealth you’ve accumulated in your home, so you will be starting from scratch. Also, you will need to maintain 20 percent equity in your home or buy mortgage insurance, which will increase your monthly payment. Never begin renovations until you have closed on the new loan, since you will need an updated appraisal. A semi-demolished home will come in low, and your lender may refuse to close.
5. Grants and programs
If you are lucky, you may qualify for a government grant or program that will actually provide you with free money or special lower interest rates. In addition to government agencies, nonprofit organizations also offer grants and specialized loans, especially for specific types of renovations, such as making homes more energy efficient.
Be sure to take a look at what is available in your general area before you pursue one of the other routes on this list. You may be surprised by the deals that are on the table. Homeowner advisors can be very helpful in terms of connecting you to resources. Typically, you will qualify for these grants or loans depending on the type of home that you have and your income level.
If you have a high income, do not automatically assume you would not qualify. Some of the grants have very high limits or none for specific programs. The most common types of programs include those meant for historic preservation, those that make homes more accessible to people with disabilities, those that improve energy efficiency of houses.