How-To: Finance Your Renovations

If you recently purchased a fixer-upper, or are planning on making big renovations to your existing home, you may be wondering what your finance options are. Below, Connie Ray, President/Owner of Coldwell Banker Platinum Partners takes us through some of the best options for financing renovations.

According to the Millennial Housing Commission, few lenders are willing to administer home improvement loans. Most prefer to make home equity loans or unsecured consumer loans, as they are easier to manage. “Home improvement loans usually require inspections and irregular draws on the loan amount as work is completed, which requires regional or national lenders to find local partners to provide oversight,” explained Ray.

Financing repairs and improvements with home equity is okay for most homeowners, but it is difficult for many first-time buyers. “This is because they have lower-incomes, smaller savings, and have made lower down payments on their homes than first-time buyers a decade ago. So they have little equity to borrow against,” Ray explained. Unfortunately, it is often lower-cost older homes purchased by first-time buyers that need the most work.

One option is refinancing your existing mortgage and taking out cash.
“With a refinance, you pay off an old loan on your home and take out a new one, usually at a lower mortgage interest rate,” said Ray. “To refinance, you will generally need to have equity in your home, a good credit rating, and steady income. You can borrow a percentage of the equity to cover things like remodeling costs, debt consolidate, and even college tuition.”

Don’t forget, however, that when you refinance, you will incur all the closing costs that go along with getting a new mortgage. “Unless you're doing extensive renovations and can get a mortgage interest rate at least two points below your current loan rate, you may want to select another financing option to pay for your renovations,” Ray suggested.

Another refinancing option is getting a second mortgage. “This is a loan against the equity in your home,” Ray explained. Financial institutions will generally let you borrow up to 80 percent of the appraised value of your home, minus the balance on your original mortgage, of course. And similar to refinancing your existing mortgage, you may incur all the fees normally associated with a mortgage. These fees include closing costs, title insurance and processing fees.

“If you aren’t interested in either of those options, you can contact the government about home improvement programs,” noted Ray. “And you can always borrow from a finance agency, but I suggest making that your last resort. They generally charge high rates.”