Loans for renovation

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 good investment

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.

Types of home renovation loans

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.

Pros

• Fixed interest rate. Most lenders will offer a home equity loan that has a fixed interest rate. This keeps you from having to worry about the rise and fall of national interest rates that cause unpredictable swings in payments.
• Funds can be used for different things. The funds can be spent at your discretion. For example, you can use some of the money for your home renovation and the rest for paying off high-interest credit cards or car loans.  
• Lower interest rates than personal loans or credit cards. With a home equity loan, your home is used as collateral in case you can’t or won’t repay it, and this results in lower interest rates. If, on the other hand, you used credit cards to finance home renovations and your credit card account has an interest rate around the national average of 17 percent, then you’ll owe thousands more dollars in interest than if you’d used your home’s equity for financing.

Cons

• Fees and closing costs. You’ll have to pay closing costs on a home equity loan because it’s a second mortgage. Closing costs are usually between 2 and 5 percent of the loan amount.
• Your home is collateral. Because you’re putting your home up as collateral, you run the risk of foreclosure if you can’t make the monthly payments or default on the loan.
• Additional debt. While a home equity loan can be a wise decision if you’re using the money to increase the value of your home or pay off high-interest debts, it is still a new loan, which means you’re taking on more debt.

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.

Pros

• Use funds only when needed. You can use only the amount you need at that time. This gives you flexibility. You can feel secure and make firm plans, knowing the money is there and available.
• Low-interest rates. A HELOC has a lower interest rate than other unsecured loans because your home is used as collateral. Some HELOCs will come with an even lower introductory rate, usually for the first 12 months.
• No payments until you draw from it. If you don’t borrow from your HELOC, you don’t owe on it. You’ll have access to the funds but won’t have to think about monthly payments until you actually use some of the money. You should check the terms and conditions to make sure you’re not at risk of being charged an inactivity fee if you don’t use it.

Cons

• Variable-rate. Most HELOCs come with a variable rate, so the interest rate at the time you apply may not be the interest rate over the life of your loan. This can lead to unpredictable payments due to interest rates rising and falling. However, there are some HELOC programs with a fixed-rate option that allows you to lock in an interest rate when you draw funds.
• Your home is collateral. When you borrow against your home’s equity, you’re putting your property at risk in case of nonpayment. If you can’t make the payments, you could face foreclosure.  
• Annual fees. A HELOC usually comes with an annual fee.

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.

Pros

• Renovations can start immediately. You can begin working on your dream home as soon as your loan closes rather than waiting for outside funding.
• Flexible eligibility standards. The FHA protects lenders in case a borrower defaults on this type of loan, so lower credit scores or nontraditional credit history will be considered for approval, which makes it easier to qualify.
• Low down payment. Like other FHA loans, an FHA 203(k) only requires a minimal down payment and can be as low as 3.5 percent.

Cons

• Extra fees. FHA 203(k) loans could be subject to extra fees, such as mortgage insurance (MI). Your Caliber loan consultant will give a run-down of all the fees before you sign so you can be sure it fits into your budget.
• Your home will be a construction zone. Your home may not be livable during the first six months because all renovations will probably need to happen at the same time to meet that six-month deadline.
• No DIY work. FHA 203(k) loans require that you track all bids and invoices, and use licensed contractors. You can’t do it yourself.

Cash-out refinance

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.

Pros

• Lower interest rate/monthly payment. You may get a lower refinance rate than your current interest rate, which results in a lower monthly payment.
• Funds can be used for anything. There aren’t any restrictions on how you use the extra funds. If you use the funds for renovations and have some leftover, you can spend them on other things.
• Fixed rates. Cash-out refinances generally come with a fixed interest rate so your payments will not rise and fall with the index.

Cons

• Must have home equity. If you haven’t built up home equity, you cannot take advantage of this option.
• Closing costs. There are often closing costs involved with a cash-out refinance, just like any other refinance. These will usually cost you between 2-to-5 percent of the loan amount.
• Your home is at risk. Even though using your home as collateral is standard protocol with mortgages and refinances, it’s still important to consider whether you want to take that risk. Taking out funds against your home will always put you at risk of foreclosure if you default on the loan.

Find the right one for you

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.