How to Finance the Right Home Improvements This Year
Home Improvements
Home improvements projects are expensive. Fortunately, you don’t have to produce the funds upfront.
In some cases, you can get a home improvement loan which enables you to finance the expenses that are associated with upgrades within your home.
Certain loans such as the FHA 203 (k) were specifically developed to help homeowners finance a renovation project.
You can also finance a home improvement project by getting a home equity loan or cash-out finance.
So the question that lies to be answered is, which kind of home improvement loan is ideal for you?
Cash-Out Refinance
A cash-out refinance can be best described as being a loan that replaces your current mortgage, with a brand new loan for more than the amount that you owe on your mortgage.
The difference between the two goes directly to you as cash that you can use to spend on home improvements projects and other needs.
In order for you to use cash-out finance, your home must have built-up equity.
Equity can be best described as being the difference between your home’s current value and what you owe on your mortgage.
For instance, if your home has a value of $200,000 but your mortgage balance is $150,000, you have $50,000 of equity in your house.
In a situation like this, if you choose to do a cash-out refinance, you could refinance your $150,000 loan balance for $200,000 of which $50,000 would go directly to you at closing, as to which you can use for renovations.
FHA 203(k)
An FHA 203(k) is a kind of loan which bundles your home improvements and mortgage expenses into one single loan.
The difference between this and the other options on this list is that you don’t have to pay closing fees twice or apply for multiple loans.
Instead, with an FHA, you’re able to finance your purchase of the property and home renovations projects at the same time.
Based on the fact that an FHA loan is backed by the government, you get special perks such as a low down payment, as well as the opportunity to apply regardless if you have less than stellar credit.
Home Equity Loan (HEL)
As mentioned above, equity is the difference between what your home’s worth and what you owe on your current mortgage.
A home equity loan enables you to make a loan against the equity that your home has built up.
However, unlike a cash-out refinance loan, a HEL cannot be used to pay off your mortgage.
Therefore, by getting a HEL you’ll have to keep paying your monthly mortgage payments and make new payments on your home equity loan as well.
When it’s all said and done, if you’re in the midst of purchasing a fixer-upper or if you want to conduct a home improvements project on an older home, an FHA 203(k) may be what you need.
This is because it enables you to finance renovation expenses and the home into one loan.
On the other hand, if your home is higher-value or more modern, oftentimes a cash-out refinance may be your best bet.
It enables you to use the equity of your home and you could get a lower mortgage rate.
Finally, while you may be able to get a HEL, it’s worth noting that interest rates tend to fluctuate so depending on your financial circumstances this should be viewed as a secondary option.
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Category: Home Improvements
