Need Ideas For Financing A Home Renovation?


So it's time to fix up your house, but you don't know how to finance the renovation. Don't feel bad, lots of homeowners have no idea where to start. There are so many options out there, yet no one seems to know about them. We're going to tell you about four of them today. We hope one of the methods of financing your home renovation works for you.

Home Equity Lines Of Credit

Home equity lines of credit are usually good for seven to ten years at a fixed rate of interest. The loan is based on the equity in the home, and is repaid each month like the mortgage payment. Loans work much like a credit card: you are given a limit, and are charged only for what you spend. No closing costs are required. You can either get a credit card or a checking account specifically for the home equity loan and may draw upon it as you see fit.

These loans are marketed quite aggressively. It pays to study each lender to find out if they offer low interest rates and then raise them several years in when you've forgotten about it. Fees and interest rates are different with each lender, so compare them well before you go with one lender.

Refinance With Cash Out

This is when you refinance your mortgage in order to get cash out for the home renovation. If your mortgage was originally $300,000 and you've paid it down to $150,000, and you want $50,000 cash out for renovation, then your new mortgage would be $200,000. You'd get a check for $50,000 at closing. This requires 15 percent equity in the home.

Look for lower interest rates than what was included in the original loan. You will be required to pay closing costs and fees.

FHA 203(k) Loans

The Federal government helps homeowners with home renovation loans in several ways. The most popular is an FHA 203(k) loan. This loan typically requires a lower credit score and a minimum down payment of 3.5 percent.

There are two types of 203(k) loans, standard and limited. Standard calls for a professional 203(k) builder to submit a detailed cost and building plan. Contractors with online degrees are also qualified to help homeowners with this loan. This loan is good for substantial renovation.

The second type of 203(k) loan is limited. It's limited to $35,000 and is only for cosmetic repairs.

Fannie Mae Loans

Fannie Mae gives home buyers a chance to buy a fixer-upper or refinance a present home in need of renovation. It's called a Homestyle Loan and entails:

  • A licensed contractor with a detailed plan and cost estimate for the work

  • A minimum credit score of 620

  • A minimum down payment of five percent of the original price of the home

The home renovation money goes into an escrow account for the use of the contractor. Homeowners can't touch the money like they could with a home equity line of credit.

Things To Think About

Obviously, homeowners will need good credit scores. The lowest some lenders will consider is a credit score of 500, but it's best to have one in the 620 to 750 range. Homeowners without these credit scores but have equity in their homes have a better chance of securing a home equity line of credit. Fannie Mae and the Federal Housing Administration also work with homeowners with less than stellar credit.

A homeowner's income to debt ratio is also an important point in getting a home renovation loan. Three to one or thirty percent income to debt ratio is what lenders think best.

Homeowners should also be current on their mortgage payments for at least a year before applying for a home renovation loan. This tells lenders that homeowners will repay the loan on time.

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