How to Finance your Renovation

As an architect, I can help you come up with all kinds of ideas for how to make your home more beautiful, livable, and structurally sound.  But how do you put together the funds necessary to pay for the construction?

Since many people don’t have the ability to pay cash for a five- to six-figure remodel project, the typical homeowner will take out a loan.  Today’s lending climate is challenging, but, according to Sandra Gray with Premiere Mortgage Resources, homeowners with good credit and home equity may still take advantage of the historically-low interest rates.

Construction Loan

Many homeowners are familiar with traditional construction loans.  You don’t need to have equity in your home to obtain a construction loan.  However, prior to getting approval on the loan, plans need to be prepared and delivered to the lender, and you will have to sign an agreement with a contractor, as well.  This could involve substantial time and expense prior to receiving the first construction draw, and there are certain restrictions on when and how this money can be
spent.

Home Equity Line

If you have some equity in your home, a home equity line is another method to finance a renovation.  According to Gray, home equity lines are attractive because the initial rates are low and they do not require an appraisal (the latter being important with the current volatility in the market).  However,  these rates are variable and attached to the prime rate.  Given the potential for the prime rate to go up (and most people expect that they will), this does involve some risk.  However, if you know that you can pay off the loan within 2-5 years, this might be a good option.

Cash-out Refinance

Cash-out refinancing lets you restructure your current mortgage and the cost of your renovation into one new loan at today’s low rates.  Refinances do involve fees and appraisals that home equity lines do not, but the rates can be fixed, which makes them attractive for larger sums or if you want to pay them off over a number of years.  How much money you can borrow will depend on many factors, but Gray suggests that an 80% max loan-to-value ratio is a good rule-of-thumb.  This means that if you determine that your home is worth $400,000, you might reasonably expect that you could refinance up to $320,000.  If you currently only owe $200,000 on the existing mortgage, this could provide you with $120,000 to pay for your improvements.

Determining which method of financing is right for you will require you to talk with a financial professional.  This person can help you evaluate the different options based on many factors, including the amount of equity you have in your home, the current interest rates, your timelines, and the cost of your improvements.