On HGTV, home renovations look quick, simple and painless. Many homeowners are surprised by all the moving parts involved in a home renovation in real life.
One area where Houseplay clients have lots of questions is how to finance their home renovation projects. As part of the free A Home You Love series, Tammy had the opportunity to interview Jeff Dulla, Vice President of Mortgage Lending with United Home Loans, a family-owned, residential mortgage bank based near Chicago. Today we want to bring you some of the most essential points from Jeff’s interview.
The first thing you should be prepared to discuss with a lender is the scope of your project. Are you renovating a kitchen, adding an addition, building a second floor to your house? The scope will help them determine the best financing options for your needs.
Here’s a breakdown of potential financing options that Jeff reviewed:
If you’re planning to purchase a home and renovate it
This is our #1 favorite tip! Jeff offered this creative strategy that we think will be very valuable with our clients – Tammy has been sharing it with all clients coming to her for Homebuyer Support.
Many buyers who currently own a home and are planning to sell it and buy a fixer-upper tend to have more cash on hand. In this situation, Jeff highly recommends putting just 5-10% down and applying the rest of your cash to the renovation.
In contrast to putting the traditional 20% down, which may necessitate obtaining a renovation loan (described below), this option gives you much more flexibility for who you can hire to do the work and much more control over how you can get it done. (Tammy’s mind was blown at this solution!)
If you already own your home
- A home equity line of credit. This is a very popular choice, but it might not be for everyone. First off, not all homeowners have enough equity to make this option viable. Plus, home equity rates are tied to the prime rate, which is set by the Federal Reserve. In the past few years the prime rate has gone from 3.5% to 5.5%; and there are more increases planned in the near future. The rate is uncapped, so if you’re unsure how quickly you can repay this loan, it might not be the best option. Still, it’s worth talking to a few lenders to learn more.
- A cash-out refinance. This means that you refinance your mortgage for more than you owe and take the difference in cash, based on the equity available on your property. It’s a regular refinance, but you’ve got a large equity position in your home. The final loan is a set, fixed-rate, fixed-term mortgage, so you don’t have to worry about the up-and-down interest rate with a line of credit.
- A renovation loan. Another option is a Fannie Mae/Freddie Mac/FHA renovation loan. Jeff offered two points to consider regarding this option:
- Renovation loans often involve a set amount of “draws” – say, five. That means that you can only draw down money five times. To pay a subcontractor, for example, they need to submit a lien waiver that will be approved by the bank. Then an appraiser needs to come out to check that the work has been done and is up to par. There can be a lot of delays between getting an acceptable lien waiver and then getting an appraiser to approve the work. That creates a domino effect of delays – both in getting the subcontractor paid and in other subcontractors being able to complete their work.
- If you do decide on a renovation loan, be sure to go through a lender that you trust to facilitate the process properly. In Jeff’s words, he would gladly have paid more during the new construction process on his own home to have a lender who was more on top of things and had a solid grasp of the construction loan process from start to finish. (This is a situation where investing a little more upfront can reduce stress and delays in the long run.)
When you’re prepared to plan carefully and have patience with the process, your home renovation will go much more smoothly! That’s exactly why we created our Vision & Planning Session – to set you off to a great start for your project. In other words: measure twice, cut once.
If you’re ready to start planning your renovation process, book your Vision & Planning Session here! There are limited slots available, so be sure to grab yours today.