Explore These Options to Finance.
Whether you are looking to freshen up or expand your existing home or a new home you are considering purchasing, the question always comes up about how to pay for this. The answer to this question depends somewhat on how much you are talking about financing and how long you believe it will take you to repay. Let’s take them one at a time. If you are trying to renovate the home you currently live in, the options are as follows:
Use Credit Cards – Oftentimes you can find a short-term 0% option and if you believe that you can pay the cards off within that introductory rate period, then this would be a good option.
Home Equity Line (HELOC) – If you have existing equity in your home, this often can be a good solution. The downside is that the interest rate floats with the prime lending rate. With the Federal Reserve continuing to raise these rates, you just need to be sure that you can pay the loan off in the first few years before rates increase too much.
Cash-Out Refinance – This might be a good option if you plan to stay in the house for several years because you would be able to secure a fixed rate loan. The challenge is that many folks already have taken advantage of lower interest rates in the past and are reluctant to take a higher rate just to get the cash to renovate. On the other hand, if you hare carrying other debt, it may make sense, from a cash flow standpoint, to consolidate some of the debt and pull money at the same time to renovate.
Renovation Loan – These work well if you hare planning on a major renovation and do not currently have enough equity prior to the improvements being made. This loan will allow you to borrow based on the “as completed” appraisal. The appraiser will look at the property and value it based on the improvements already being completed. The interest rate on this product is slightly higher but it is a fixed rate.
If you’re looking to do some renovations to a home you are considering purchasing, consider the following:
Low Down Payment – Instead of making a large down payment on the new loan, consider doing a low down payment loan (even if you have to pay PMI) and use the remaining cash to do the renovation. Rates for PMI have come way down in recent years for those who have good credit.
Renovation Loan – As mentioned above, this works very well because you can go off of the appraisal based on the work already being completed. So essentially, in a perfect world, you would be able to finance the entire improvement project. The downside is that you need the seller to be flexible upfront and give you enough time to complete the planning project and get contractors to price out the work, to make sure it’s feasible.
For more on the pros and cons of some of these options: How to Pay for Home Renovations: Pros & Cons to Different Methods
Feel free to give us a call to explore options based on your particular situation.