While we’re all safe inside practicing social distancing, your “honey-do” list and project wish-list for home improvements may be growing. Home has never been more important than it is now, and small changes can go a long way to improve your quality of life, especially when you’re spending so much time at home.
Some projects are easy to tackle by yourself while you’re stuck indoors, like painting a room or swapping out a light fixture. Other changes take more time, planning, and money to make sure they’re done right.
Lifestyle vs. Budget
When you’re planning a major improvement, there are many ways to calculate the return on investment. If adding a pool to your backyard makes your summers comfortable and increases the time you spend outdoors, this may offer a lot of value to your quality of life. If the feature you’re updating doesn’t appeal to a broad audience, though, it may not increase the value of your home.
Some people want to renovate their home to add an in-law suite for their parents or to add on an extra bedroom for the fourth child they’re expecting. These are perfectly fine reasons for renovation. Before jumping in, however, you need a plan scope, design, construction, budget, and financing.
While the total impact of COVID-19 on the real estate market and global economy is unknown, it’s also wise to consider the amount of risk you’re willing to take. Especially with record low interest rates, preserving your cash by financing projects may make more sense now than ever, but if you’re concerned about job security after COVID-19’s impact on the economy, putting your home down as collateral is a risky option.
When it comes to loans for renovating your home, there are a wealth of options, each with their own risks and benefits. Here is an introduction to some of the most powerful tools for financing home improvements: Renovation Mortgage Refinancing, Home Equity Loans, and Cash-Out Mortgage Refinancing.
Renovation Mortgage Refinancing
How it works: With a renovation refinance loan, you’re replacing your current mortgage with a new one. You’ll finance the cost of your house (whatever principal you still owe your current lender), PLUS the cost of the renovation–all wrapped into one neat and tidy loan.
Ideal for: Larger projects, like an addition or renovating multiple rooms.
Renovation Mortgage Loan Limits: Up to 80%-90% of the improved value of the home.
Other considerations: You must use a certified contractor. This contractor should prepare and submit an estimate and details of the work to be performed when you apply for the loan. The house will also need to appraise at a high enough value to justify the planned improvements.
How we can help: The projects you’re completing for a renovation loan will need to add enough value to your home to ensure your loan-to-value ratio still meets lending guidelines. As experts on market value, we can help you understand the current market value of your home, as well as how your improvements will increase your home’s value.
We have used renovation refinancing ourselves, and can also offer guidance on the process–from questions on designing your space to finding a lender or contractor, we are here as a resource to you!
Home Equity Loan / HELOC
How it works: A home equity loan is also commonly called a second mortgage. A home equity line of credit (HELOC) is similar to a home equity loan, but it gives you a line of credit to pay down large expenses. An appraiser assesses the current market value of your home, and the bank will allow you to borrow up to 80%-90% of the total value.
Ideal for: Home Equity loans are most commonly known as a tool to consolidate high-interest debts, but they can be a great tool for home renovations as well. Consider using a Home Equity Loan or HELOC if the project you’re tackling doesn’t add a huge amount of value to your home, such as a swimming pool, new windows, or finishing your basement.
Home Equity Loan / HELOC loan limits: Depends on the value of your home, and lender requirements. Typically you can borrow up to 80% or 90% of the value of your home.
Other considerations: One benefit of Home Equity loans is that they typically have lower closing costs than refinanced mortgages. They do typically need to be paid off in 10-15 years, compared to 30 years for a refinanced mortgage. Just like other mortgage products, you are promising part of your home as collateral. This means the lender could take your home if you fail to make payments.
How we can help: You’ll get the most out of your loan by understanding where your home’s value is before you apply for the loan. We are happy to pull a competitive market report to help you narrow in on your home’s value, and we’re also happy to offer our opinion on how the projects you have planned may help improve the finished value of your home.
Cash-Out Mortgage Refinancing
How it works: A cash-out mortgage refinancing replaces your current mortgage with a new one. The difference is that you get cash out of the home, rather than bringing cash to the closing table. The home is appraised at current market value, and the lender will loan you around 80% of the value of the newly appraised value. Once all your current obligations are paid off, the balance of the cash is yours to spend as you wish.
Ideal for: This option works well if you’ve been in your home for a long time and currently have a high interest rate or high mortgage insurance. It also works well if you want to complete your renovations yourself using cash you’ve already saved, then put that cash back into your savings account.
Cash-Out Mortgage Refinancing loan limit: Up to 80%-90% of the value of your home.
Other considerations: Keep in mind that refinancing your home involves lender fees and title fees, so the overall cost to refinance may be as high as 3%-5% of the value of your home. This may be worth it for a lower payment, but often isn’t a good idea if you’re thinking of moving soon. Also, just like other mortgage products, you could lose your home to the lender if you miss payments.
Getting Started
There are a lot of variables to consider when planning a renovation. It can be overwhelming, but you’re not alone! Our experience as realtors, homeowners, and renovators ourselves helps us to help you. We know which questions to ask, and where to go for answers.
It is our joy to help homeowners invest in their home and make the most of their space. Contact us with your questions about home improvement, or to learn more about which financing products may work best for you.
And don’t forget to tag us or send us pictures when your project is done!
Cheers,
Julie & Ted