Renovating your home is a great way to increase your equity and improve your current quality of living! Depending on your situation, you have a few options in financing these upgrades.
- Home Equity Loans – You may be eligible for a second mortgage based on your existing home equity. Home equity loans are paid in lump sum and have a fixed rate, usually slightly higher than conventional mortgage interest rates. Transaction fees and closing costs can be comparable to a primary mortgage, and there may be a pre-payment penalty if you pay off the loan early.
- Home Equity Lines of Credit (HELOC) – Similar to a credit card, a HELOC provides access to a revolving credit line based on your existing home equity. HELOCs are best for periodical or sporadic projects, in which you might need to borrow varying amounts of money over time. There are no associated closing costs; however, the interest rate is adjustable. Origination fees may vary by lender. Beware of low introductory interest rates, followed by an increase in rates.
- 203(k) or Construction Loans – If you’re interested in purchasing a home that needs significant repairs, you may consider a 203(k) loan. These loans are structured to provide homeowners with a traditional mortgage and access to the funds required to make home improvements. The fees and interest rates associated with these loans may be higher than traditional mortgages since they are more complex and riskier for the lender. The terms of the loan require a contractor to estimate the scope of work, which is approved by both an appraiser and the lender.
Financing should ideally be reserved for projects that will add value to your home, such as a kitchen or bathroom renovation. A combination of savings and financing may be the best approach – be sure to evaluate all of your options and weigh the pros and cons of each strategy!