Four amazing options to renovate your home without breaking your bank account
Home renovations can bring about great excitement with new appliances, design, and creativity. However they can also be a source os stress and a drain on your finances!
When it comes to funding home renovations, most people think dipping into their savings or taking a personal loan are the only options available. However, this is not true, there are several affordable options out there that can help you get the dream makeover without breaking your bank account.
1) Home equity line of credit (HELOC)
A home equity line of credit (HELOC) allows you to borrow funds from a lender based on the amount of equity you own in your home. HELOC’s are not like traditional loans where you receive a lump-sum payment and pay it back in installments. Instead it functions more like a credit card giving the borrower the flexibility to borrow, payback, and borrow more funds from the HELOC.
Lenders allow borrowers up to 80% loan-to-value (LTV) ratio which means depending on how much equity you own, you can go up to 80% of the home value. This also means you must own at least 20% of the home before being eligible for a HELOC. This can be a considerable portion and can be used to finance large construction projects.
Pros:
- Borrowing flexibility
- HELOC fees can be waived
- Interest can be claimed as tax deductions
Cons:
- Home is collateral
- Variable interest rate which can lead to unpredictable payments
- Home equity must be at least 20%
2) A home equity loan
A home equity loan is very similar to a HELOC where funds are being borrowed based on the equity owned in the home. However, a home equity loan acts like a second mortgage, where you will receive a lump-sum amount and pay it back in equal installments over the loan period. Lenders can go up to an LTV ratio of 85%, meaning a higher borrowing availability.
Pros:
- Low-interestrate
- Predictable payments
- Fees can be waived
- Interest payments can be claimed as tax-deductible
Cons:
- Home is collateral
- Requires a credit score greater than 670
- Must have at least 20% home equity
- Second mortgage payment over the existing mortgage payment
3) Cash-out refinance
Cash-out refinance is the process of borrowing additional funds when you get your mortgage refinanced. Refinance involves paying off your current mortgage balance by borrowing funds from a new mortgage with better terms and conditions. Usually, it involves getting a lower mortgage rate which can help reduce your monthly mortgage payment.
Cash-out refinance can help you borrow a substantial extra portion if your existing balance is lower. For example, if your home value is $400,000 and your current outstanding balance is $250,000, which is an LTV ratio of 62.5%, then you could be eligible to borrow up to $70,000.
Pros:
- Lower interest rate
- Single mortgage payment
- Repayment term is the refinance term
- Interest payment can be tax-deductible
Cons:
- Home is collateral
- Refinance closing costs fees
- Mortgage insurance required if LTV > 80%
- Debt-to-income (DTI) ratio must be less than 43%
4) Federal programs
This is often an overlooked option by a lot of homeowners. There are several good home renovation loans available through federal grants and benefits. You have to be eligible for these loans to be able to make use of some of the renovation grants. However, if you qualify for FHA loans, VA loans, and USDA loans then you could qualify for these benefits.
FHA loans havethe FHA 203(k) loan which can be used for home renovation and a mortgage combined into one. This can help save on multiple payments as the renovations can be part of the mortgage. VA loans and USDA loans also offer similar programs.
Pros:
- Low-interest rate
- Single mortgage payment
- Several grants available
Cons:
- Must be eligible
- Not all lenders can make these loans
There are many home renovation finance options
In conclusion, there are several great options out there to renovate your home. If you have a big job such as a kitchen remodel or installing a pool, then big loans such as home equity loans and cash-out refinance are best. Whereas, if you have a small job or something that needs ongoing repair then a HELOC is best as you will only be charged interest on the amount that you borrow.
If you qualify for federal programs, then those are the lowest cost alternative. Be sure to check all the different alternatives before choosing one that best fits your needs!
