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Financing Home Improvements

little boy wearing hardhat holding a piece of plywood
August 10 2018 • by Deirdre Jannerelli • Home Ownership, Home Tips

Have you dreamed of remodeling your kitchen or redoing your bathroom? Believe it or not, you don’t necessarily have to save for years to make it happen. Whether you’re looking to install granite countertops, replace a shower, or even build a garage, there are plenty of ways to finance your home upgrades without breaking the bank. 

Let’s start off by mentioning that credit cards could be a bad idea when it comes to borrowing money for home renovations. While it’s certainly easy and can be very tempting to charge home improvement expenses to your credit card, you should keep in mind that credit card interest rates are usually very high. So, unless you’ll be able to pay off your entire card balance quickly, your upgrades could wind up costing you far more than you bargained for if you use a credit card to pay for them.

Some other options for funding your home improvement projects include loans, lines of credit, and refinancing. While the application and approval process will certainly take longer than it would for you to whip out a credit card, these financing alternatives will likely be more economical for you in the long run. Let’s take a closer look.

Home Equity Loans

A home equity loan is a second mortgage that is secured by your home. With this type of loan, you borrow a lump sum of money at a fixed rate, and you repay it by making regular payments each month. With a home equity loan, the amount you’re able to borrow will depend on the amount of equity you currently have in your home. One important thing to keep in mind with a home equity loan is that because your home serves as a guarantee, you could risk losing your home to foreclosure if you fail to make your monthly payments.

Home Equity Lines of Credit

Like a home equity loan, a home equity line of credit (commonly referred to as a HELOC) is secured by your home. And like a home equity loan, the maximum amount you can borrow will be determined by the level of equity you have in your home. But a home equity line of credit works more like a credit card than a traditional loan. You have a revolving balance, and a maximum amount that you can borrow. You withdraw money as you need it during the “draw period”, and as you pay off the amount borrowed, you can use the available credit again. During the draw period, your minimum monthly payment obligation will cover interest only, although you can pay more than that to help reduce your balance. You’ll be required to start paying back the principal during the “repayment period”, which follows the draw period. It’s important to keep in mind that unlike a home equity loan, a HELOC typically has a variable interest rate, which means it can fluctuate during the loan’s term. So, your payments are likely to vary each month depending on the interest rate, the current amount owed, and whether you’re in the draw period or the repayment period.

Cash-Out Refinancing

With a cash-out refinance you basically replace your existing mortgage with a bigger mortgage, and the difference between the new loan amount and the old loan amount is paid out to you in cash. For example, if you currently owe $170,000 on your mortgage, and replace it with a $200,000 mortgage, you could potentially take the $30,000 difference in cash and put it toward your home renovations. It’s important to note however that refinances typically have closing costs associated with them, so the amount of cash you end up with could be reduced. Another thing to keep in mind with a refinance, is that if it results in you having less than 20% equity in your property, you could wind up having to pay private mortgage insurance (or PMI) on your loan.

FHA Title 1 Loans

If you’re interested in making home renovations, but don’t have enough equity in your home to qualify for a home equity loan, HELOC, or a cash-out refinance, an FHA Title 1 loan may be a good alternative. This is a fixed-rate loan that can be used for home improvements, rehabs, and repairs, and can even be used to purchase new appliances. However, any work being done with an FHA Title 1 loan needs to have a direct impact on the livability or usability of the home in order for it to qualify. In other words, you can’t use this type of loan to make “luxury” upgrades like installing a hot tub or a swimming pool, but you should be all set if you’re looking to replace your roof or retile a damaged floor. The maximum amount you can borrow will vary based on what type of home you have, with a max of $25,000 for a single-family home, or a max of $12,000 per unit for a multi-family home (up to $60,000). In order to qualify for an FHA Title 1 loan, the home will need to have been occupied for at least 90 days, you’ll need to meet specific debt-to-income ratio requirements, and your home improvements will need to be verified. Unlike a home equity loan or line of credit, FHA Title 1 loans require you to pay an annual FHA mortgage insurance premium of $1 per $100 borrowed. And while these types of loans don’t require any specific amount of home equity, any amount you borrow over $7,500 will be secured by your home.

Personal Loans

Another option for borrowers who don’t have much equity in their home is a personal loan. Personal loans are not secured, or guaranteed, by your home, so the amount you can borrow will typically be lower than the other financing options we’ve discussed, but they can be a good choice if you’re looking to borrow a relatively small amount of money. Personal loans also tend to have higher interest rates than secured loans, however those rates are still often significantly lower than credit card interest rates. Also, personal loan debt is considered “installment debt”, which is typically viewed as a more favorable type of debt on your credit report than credit card debt.

Energy Efficiency Loans

If you’re specifically looking to make energy efficiency improvements to your home, you may want to consider an energy efficiency loan instead of a personal loan. Depending on where you live, or who your energy provider is, you may have a multitude of options available to you. Qualified homeowners in Massachusetts can take advantage of interest-free financing for energy-efficiency upgrades through the Mass Save® HEAT Loan Program, and RI homeowners have a similar opportunity with the Rhode Island 0% Financing Program offered by National Grid. BankFive is a partner of both of these programs. And MA homeowners who are looking to make the switch to solar energy can get some assistance as well, through the Mass Solar Loan Program.

As you can see, there are many financing options available to borrowers who are looking to make home improvements. Which one is the right fit for you will depend on your unique needs and financial situation, but our expert mortgage originators and branch managers are here to help guide you every step of the way. Visit one of our branches, or contact us to schedule an appointment today!