How Do Home Improvement Loans Work?
- Dec. 27, 2018
- Susan Belknapp
- Home Loans
A Home Improvement Loan Can Be the Magic Bullet to Getting Your Renovation Project Done
Most homeowners have them – a list of hopes and dreams for your house. Even a brand-new home needs a yard put in. Is it a swimming pool or spa? Outdoor kitchen/living area? Or would you like to bring your older home into the 21st Century? There are a few different ways to access the money to do these types of improvements and New American Funding offers several great options. Which you choose may depend on where you are in your homebuying/homeowning process and what types of improvements you want done. But how do home improvement loans work?
The main loan types for home improvements include: Refinance with Cash Out, an FHA 203(k) Renovation Home Loan and a Fannie Mae HomeReady. The first is only for people who already own their home. The latter two are types of home loans for fixer uppers or those who are actively looking for a home they can purchase and renovate. Those programs aren't only for purchase, however, you can also use them for refinance.
Refinance with Cash Out
If you've owned your home for more than a year and have at least 20% equity, a Refinance with Cash Out is likely an idea option for accessing a loan for home improvements. A lender such as New American Funding can advise you on the right options that will depend on the amount of equity you have, the types of renovations you plan to make and your current financial picture. You can take money out for any reason but it's always good to discuss the improvements you plan to make because the value they potentially add to your home can help counterbalance the equity you've used. For example, if you take out $30,000 to modernize your kitchen and it adds $20,000 to your home's value, the equity may be offset with the increase in value.
This program from the government-sponsored enterprise, the Federal Housing Administration, fills a an important need. It can be used when you are first buying a home (usually a "fixer-upper"). With this program, the financing for the purchase and renovation can be rolled into one convenient loan. Section 203(k) insures mortgages covering the purchase or refinancing and renovation of a home that is at least a year old. A portion of the loan amount goes to the purchase of the home, or, if a refinance, to pay off the existing mortgage. The remaining funds are placed in an escrow account and released once the improvements are complete. The cost of the renovations must be at least $5,000 and the value of the property is determined by either "(1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less."
The caveat to this program is that the types of improvements you make are quite specific.The list of eligible improvements can be found here, but most are related to structural, safety and energy-efficient repairs and not cosmetic or recreational repairs.
Fannie Mae HomeStyle
Fannie Mae has a program similar to FHA's 203(k) in that you can purchase and renovate or refinance and renovate and the two amounts will be packaged into one loan. HomeStyle allows for a much wider berth when it comes to allowed improvements. With this loan, you can get your dream backyard or room addition. The loan to value (LTV) is "calculated taking the proposed project into account, giving borrowers more purchasing power and more options to make their home their own."
HomeStyle loans can be used on any renovation project and the costs approved up to the lesser of 75% of the purchase price plus renovation costs or the completed appraised value. Interest rates may even be lower than a home equity line of credit (HELOC), personal loans, or credit cards. You are not limited on the types of improvements you can do either. So get that dream kitchen or pool and spa and enjoy your improvements while you're in your home and know that you've also increased its value.
Which is Right for You?
Now that you know how home improvement loans work and you understand how loans for a house purchase and improvement differ from an improvement to your existing house, you can decide which improvement you want to make first. A New American Funding Loan Officer can answer any questions regarding all three types of loans. Call today.