Whether you’re in the market for a fixer-upper or you just want to upgrade your current residence, Caliber Home Loans, Inc. ("Caliber") offers a wide array of financing options specifically designed for improving your home.
A home renovation not only improves the functionality, comfort and beauty of your family’s home, but most updates will also increase the value of your home and the return on your investment once you decide to sell.
Financing for home renovations can be obtained at any point in your homeownership lifecycle, from the beginning of the purchasing process to years down the line.
It’s important to keep in mind that different types of renovation loans have different qualification standards, and some will require you to show proof that the funds are being used to pay for labor and materials. However, other types of renovation loans allow the money to be used more flexibly –you’re in full control of how the money is spent. Your Caliber loan consultant can help you find the right loan structure for your needs.
Home equity loan
A home equity loan is an option for people who have established equity in their current home. That means your home is currently worth more than what you still owe on it. For example, if your home is valued at $200,000 and you have $100,000 left to pay on your mortgage, then you have $100,000 in home equity.
Once you have built up home equity, you can apply for a loan that borrows against that equity in your home, or a second mortgage. These loans will typically loan up to 80 percent of the available equity, based on your eligibility. Therefore, if you have $100,000 of home equity available, you may be allowed to borrow up to $80,000. With a home equity loan, you’ll receive the requested amount in one large lump sum to begin using immediately.
While the most common use of home equity loans is for home renovations, you can also use the money for debt consolidation, tuition or other large purchases. A home equity loan will usually have a lower interest rate than a standard personal loan and the terms range from 5-to-30 years, allowing for flexibility in how long you can take to pay it back. That makes it a good option to consider when you need to pay high-interest debts or tuition. But spend the money wisely and make sure you can make the payments because you’re using your home as collateral.
Home equity line of credit (HELOC)
A home equity line of credit, or HELOC, is a lot like a home equity loan in that it’s a line of credit available to you based on the equity you have in your home. As with home equity loans, you can usually borrow up to 80 percent of your equity. What makes the HELOC different is that it’s a revolving line of credit made available to you that you can borrow against several times during the life of the loan. It works like a credit card; you can use a portion of the funds for home renovations, bills or other expenses and when you pay it back, those funds become available for use again. You can also borrow smaller amounts rather than one lump sum because you take out only what you need or want to use.
If your home is valued at $200,000 and you have $100,000 left to pay on your mortgage, the max amount allowed for your credit line is $80,000. If you want to use $20,000 to have a new roof installed, it will leave you with $60,000 available in your HELOC to spend on other purchases. If you choose not to use the extra funds during your draw period – the time period in which you can borrow against your equity – you’ll pay back the $20,000 at the end of the term. Or you can borrow for another need from the remaining $60,000 at any time during the draw period.
You can also choose to pay back some or all of the money you’ve borrowed – in this case, the $20,000 – which will give you access to $80,000 and restore your full credit line during the draw period.
With a HELOC, you can decide not to use some of the money, but it’s there if you need it. However, these funds won’t be available to you forever. A typical HELOC term comes with a 10-year draw period – the time in which you can use the line of credit – and a 20-year repayment period – which is how long you have to pay off the remaining balance.
FHA 203(k) loan
Maybe the cost of a move-in ready home in the area in which you want to live is too expensive. So, you’re considering a fixer-upper instead. In this situation, an FHA 203(k) loan may be exactly what you need. This loan is government-issued and geared toward homebuyers who want to begin renovations right after closing on a home. It adds renovation funds to the cost of the mortgage. The funds for the home purchase and renovation are separated out, and the renovation funds are put into an escrow account. Contractors are paid directly from the escrow account as the renovation proceeds.
Another good thing about this type of loan – the down payments are as low as 3.5 percent. FHA 203(k) loans are only available to owners and occupants, and not investors. It’s important for you to know exactly what renovations you want and meet with contractors before the closing so you can request the correct amount and complete the renovations in the required 6-month timeline.
A cash-out refinance replaces your existing mortgage with a new loan that is equivalent to your home’s current value, which should be more than what you presently owe on your house. Then you take your new loan amount for the current value, subtract what you owe on your previous mortgage and the difference goes to you in cash.
Up to 80 percent of the equity can be borrowed and the funds can be spent at your discretion, from home improvements to debt consolidation.
This can be an ideal solution if you would like one monthly payment, are considering refinancing and have a good idea of the home improvements you would like to make. Homeowners aren’t required to borrow the entire 80 percent, so you can customize your loan amount to best fit your needs.
Renovating a home can be both exciting and stressful – finding the right financing solution will smooth the way. It’s important to closely examine your financial situation and discuss your goals with your Caliber loan consultant in order to pick the right loan for your situation. With the right financing tools, you can have the home you really want.