A dream house doesn’t stay a dream house forever. Things need to be updated, renovated or completely changed out.
But whether it’s putting in a gas fireplace, building a deck or getting a new air conditioner, money is needed.
One of the biggest mistakes homeowners can make is financing a home improvement for longer than the improvement will last, says Casey Fleming, author of “The Loan Guide: How to Get The Best Possible Mortgage.” He has been a mortgage professional in the San Francisco area for decades.
“There are many options to look into when it comes to getting the money you need for improvements,” he adds.
Here are some of the different ways you can get your home improvements completed:
This is the cheapest way to do a renovation because you don’t have to use any financing. Your tax refund would be a good start, and you can sell one or more of your assets to get some extra cash.
“To save money is tough for some people. But you have to be diligent and buckle down on expenses,” Fleming says. “It’s all about priorities – a new kitchen or a Harley.”
Home equity line of credit
“This provides you with a tremendous amount of flexibility at a low cost,” he says. “And you don’t need a whole lot of equity in your property.”
Most equity line lenders require your combined loan-to-value (CLTV) to be 90 percent or less for a home equity line of credit. If your CLTV is too high, you can either pay down your current loan amount or wait until your home value has increased.
Also, you don’t pay interest until you actually use the money. That line of credit can be good for up to 10 years and many times renewable.
This could be a huge risk if people don’t understand all the ramifications.
“If you get half way through your renovation, and you run out of cash or credit or both, it’s impossible to get a home loan to consolidate them,” Fleming says. “You can’t get a new loan if the work is partially complete.”
Most people don’t know this, and it can be tragic. He has seen people who have nowhere to turn for money when only half of the work is complete.
Full construction loan
Interest rates for full construction loans are very favorable. But they are usually short-term loans that must be refinanced into a traditional mortgage loan once the home is completed.
These loans can only be used to build a house or make a major renovation. It could be a good idea if you are building a major addition such as a master bathroom which costs more than the equity you have in your house.
There are a lot of requirements for these loans, and the money isn’t released until parts of the remodel are done.
Some contractors will offer in-house financing.
“They try to entice you with 12-months same as cash. But these can be really expensive options,” Fleming says.
The upfront fees can be very high, and even if they charge the contractor the upfront fee, the contractor will build that into your price with either a higher interest rate or slightly lower quality materials.
Private and government-funded grants
Along with private and government-funded grants, you might even be lucky enough to live in an area with organizations offering private or corporate grants for remodeling. Check with your county for this type of help.
Some organizations even offer the manpower to do the work if you are unable to afford the work or complete it yourself. There also are home improvement grants and loans for specific groups of people including seniors.
Also, check with government agencies in your state, county or towns for help. For instance, the USDA Rural Development in Texas administers the Single Family Housing Repair Loans and Grants Program that offers up to a combination of $27,500 in assistance through loans and grants for repairs.
If you are 62 years old, a reverse mortgage can be used for anything you want.
“Literally, these mortgages can save people’s lives. If a roof fails, and they can’t qualify for some other loan, they can get a reverse mortgage to pay for the roof,” he says.
FHA 203k loan
FHA 203k loans can be used for refinancing if your house requires a lot of repairs. The problem is that like all other FHA loans, you will have to pay for mortgage insurance the life of the loan.
A Streamlined 203k program also is available for up to $35,000 for less major remodels.
Fannie Mae Homestyle Renovation Loan
This type of loan allows homeowners to make moderate home improvements with a single-close first mortgage, rather than a second mortgage, home equity line of credit, or other, more costly methods of financing.
The loan amount is based on the “as-completed” value of the home rather than the present value.
“You can include luxury items with this loan such as a pool, outdoor kitchen and landscaping,” Fleming adds. “There are fewer hoops to jump through compared to an FHA loan.”
Title I Home and Property Improvement loan
The good thing about these loans for private lenders is the Department of Housing and Urban Development (HUD) insures them against any loss or default.
These loans offer help for both large and small improvements. The maximum amount is $25,000. Title I can be used in conjunction with a 203(k) Rehabilitation Mortgage.
There are plenty of options available to those that want to complete a major renovation. Renovations can increase the value of your home while also making it more comfortable to live in.