Best Way To Finance A Home Improvement Project – Financing a renovation project doesn’t have to be a hassle. A game plan to choose the best price.
Until recently, borrowing money for a new kitchen, second floor addition, or other home renovations meant going to the bank, seeing a loan officer, and hoping for the best. However, today you have many options to help finance home improvements. A mortgage broker, for example, may offer more than 200 different loan programs. And businessmen are one of many lenders willing to put together a loan that fits your situation, even if your story isn’t perfect.
Best Way To Finance A Home Improvement Project
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This means you may be able to borrow more money than you think. But with so many different lenders, loan options, and terms, that means home improvement shopping can be as difficult as finding a home. You can skip all the confusion and access the right loan program:
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Whether you hire a contractor or do the work yourself, start with an accurate estimate of the project cost.
Lenders will hold a certain percentage before working with you. If you’re hiring a contractor, start with a firm offer, broken down by labor and materials. Then add 10 percent for surprises. In the DIY job, include a list of specific items with the exact quantity, price, and amount. Includes permit fees and equipment rental. Then add a 20 to 30 percent cushion to be safe.
Once you know how much you need to finance your home improvement project, how much will you get? Despite the promises lenders make in their advertising and promotional materials, how much you can borrow depends on your credit score, loan-to-value ratio, and your income. These factors also help determine the interest rate, loan term, and whether you’ll pay points.
Your credit score. The best rates and terms go to homeowners with an A rating: no late payments in the last 12 months and no outstanding credit cards. One or two late payments or bad credit cards won’t put you out of business, but it could result in a higher interest rate and lower loan.
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To determine the loan amount, lenders use the loan-to-value ratio (LTV), which is a percentage of your home’s appraised value. The standard limit is 80 percent, or $100,000 for a $125,000 home (0.805125,000). Lenders subtract your mortgage balance from that amount to arrive at the maximum you can borrow. Assuming your balance is $60,000, the largest loan you can get is $40,000 ($100,000-$60,000 = $40,000). If you have a good credit score, your loan may be based on 80 percent LTV; if you don’t, you may only get 65 to 70 percent. While most lenders aim for 100% LTV, interest and fees increase at these higher rates.
Your income. If your expenses are also high, a high income may not mean a big loan. Investors follow two rules to reduce risk:
The LTV determines how much you can borrow, and your debt-to-income ratio determines the monthly payment you’re eligible for. Within these two bounds, the biggest trade-offs are interest rates, loan terms, and scores.
Free interest. The less interest you pay, the bigger the loan you can afford. An adjustable rate mortgage (ARM) is one way to lower that rate, at least temporarily. Because borrowers aren’t locked into a fixed rate for 30 years, ARMs start at a very low rate. But prices may change 6, 12 or 24 months later. Most have annual increases and caps on the maximum rate increase. But if prices go up quickly, so will your wages.
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Loan period. The longer the loan, the lower the monthly payment. But the total interest rate is much higher. That’s why you’ll pay much less for a 15-year loan than a 30-year loan, if you can afford the higher monthly payments.
Thoughts. Each point is a down payment equal to 1 percent of the loan. Points of interest are paid up front and can reduce your monthly payments. But if your credit isn’t perfect, you may have to pay points to get the loan.
Commercial loans often start with private mortgages from banks, credit unions and brokers. Like all mortgages, they use your home as collateral and the interest on them is deductible.
Unlike some, however, these loans are either insured by the Federal Housing Administration (FHA) or the Veterans Administration (VA), or the loan is purchased by Fannie Mae and Freddie Mac, two organizations created by Congress for that purpose. These are called A loans from A lenders, with lower interest rates. The catch: you need permission to access them. Since you probably have a mortgage on your home, any home loan is a second mortgage. It may sound bad, but a second mortgage can cost less than a refinance if the rate on your existing mortgage is low.
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Search for first and second rate mortgages. If the result is lower than the current rate, the second mortgage is cheaper. When should you refinance? If your home has really appreciated and you can refinance with a low-interest 15-year loan. Or, if the rate available on a refinance is lower than the average on your first and second mortgages. If you’re out of finance, consider these types of loans:
Home loan. These mortgages offer the tax benefits of traditional mortgages without the down payment. Get both the loan upfront and the payments in 15-30 years. And because the interest rate is usually fixed, monthly payments are easy to budget for. Repayment: Rates are usually slightly higher than conventional mortgages.
Home Equity Line of Credit. These mortgages work like credit cards: lenders give you a cap on how much you can borrow; then they pay interest only on the amount used. You can book as much as you need – extra if your project takes several months. Some programs have very little cash back, while others have a checkbook or credit card option with no minimum. There are no closing costs. Interest rates are adjustable and most are subject to higher rates.
Most programs require repayment after 8-10 years. Banks, credit unions, brokerages and finance companies all sell these loans aggressively. Lines of credit, fees, and interest rates vary widely, so shop carefully. Look for lenders who hook you up with a low rate first, then raise it.
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Find out how high inflation is and how it compares. And be sure to compare the annual percentage rate of charge (APR) and the various closing costs. Unlike other mortgages, costs, such as appraisal, origination, and property expenses, are represented in a lower APR range for comparison.
These FHA insured loans allow you to refinance your original mortgage and combine it with the cost of improvements to a new mortgage. They also base the loan on a home’s value after improvements, rather than before. Since your home is worth more, your equity and the amount you can borrow are both greater. And you can hire a contractor or do the work yourself.
The downside is that loan limits vary by province and tend to be low. The average duration is 30 years.
Energy Efficient Mortgages (EEM). Let’s say your home’s R-value is the envy of your block. An EEM of Fannie Mae or another can increase the debt-to-income ratio by up to 2%. Energy-efficient homes have lower utility bills, so the homeowner can afford a better loan. EEMs are used for new construction; lenders are now pushing for existing homes. EEM requests a decision to qualify your home under Fannie Mae Energy Efficiency Guidelines.
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Loans B and C. What if your debt is less than A or does not match normal employment or income? Loans B and C are a default. While most banks offer them, credit unions, brokerage firms and finance companies do as well. You will also find lenders pushing B and C loans for debt consolidation with attractive interest rates. Be warned, though: Total interest and fees are often higher due to the added lender risk. And since B and C have no requirements and conditions, comparing them is difficult.
Humanity. Housing is not the only loan guarantee. Stocks, bonds, certificates of deposit, a savings account, and even a retirement or retirement account can also help you get a personal loan from many media outlets and banks. While the interest is not tax deductible, the rate can be low enough to make these loans attractive. You also save on traditional title, appraisal, and other mortgage closing costs.
For a personal line of credit, the best place to start is your bank or credit union. All are often offered lower rates for investors. Check other sources to be sure. If you get a second mortgage, refinance, or opt for an FHA 203(k) mortgage, it’s best to talk to a mortgage broker.
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