Remodeling your home can increase your home’s value and improve your everyday life. Updated finishes, an expanded kitchen with a walk-in pantry and mudroom, adding a full bathroom, or creating a primary suite may be too much for your savings or available credit. So, how will you finance the remodel?
Learn everything you need to know about remodeling loans, their pros and cons of renovation loans, and how to choose the best loan for your personal financial standing.
You’ve imagined what a new kitchen or whole home remodel could do for you and your family, but how will you know if the loan you get will cover the costs? To learn what your available budget could be for your Charlotte home remodel, you’ll need to first learn about the different types of loans that can finance your remodel. The four most common loans are:
Many homeowners will choose a HELOC for its lower rate than other types of loans and the possibility to deduct the interest on their taxes. There’s also the added flexibility that other loans don’t carry. A HELOC is like any other line of credit, where you can borrow against it during the draw period for your Charlotte remodel, pay it back, and borrow more.
During the draw period–typically ten years–you will only be required to pay the interest. When the draw period ends, you will begin a repayment period and will pay both the interest and the principal. This is actually a downside of HELOCs, because you will be paying off the debt for longer, and in larger amounts, by only paying the minimum to start. Of course, the amount you pay above the interest is up to you, so paying more should be part of your plan.
Another possible drawback is that the interest rate is unpredictable. HELOC borrowers could end up with a rate that differs from the original rate they received when they agreed to the loan, like In times of inflation, when rates rise. One way to avoid being subject to rate fluctuations is to convert your HELOC to a fixed-rate HELOC or fixed-rate home equity loan, which only some lenders offer.
A home equity loan is a type of second mortgage that is secured through having equity, which is your home. You’ll need to know exactly how much to borrow for your remodel in order to receive a home equity loan. Once approved, you’ll receive the lump sum and make fixed monthly payments over a set period of time, up to 30 years. Because you are seeking a loan for home renovations–whether it’s a whole home remodel or a complete outdoor living area–you might qualify for a tax deduction on the interest you pay.
Lenders consider this type of loan less risky because it’s backed by collateral, which will garner a lower interest rate. With a low fixed rate and fixed payments over a predetermined length of time, this type of loan is very attractive to homeowners wanting to increase their home’s value with a remodel.
The interest rate for this type of loan will be lower than a personal loan because of the equity you carry. The rate will depend on your financial factors, however. The loan-to-value (LTV) ratio is used to determine the amount you can borrow, and can be as much as 80% of your home’s current value.
Lenders look at the following qualifications:
Your monthly payment will be greatly influenced by your repayment period. A shorter period will, of course, mean higher payments. A longer repayment period will result in lower payments. However, you will end up paying more in interest over the longer period of time. Look realistically at your financial health to determine the most feasible monthly payment.
One drawback of a home equity loan is the inflexibility. If you’re applying for a loan, you will need to avoid borrowing too little to cover your home remodel. You can work with your builder to time your application in a way that ensures you’re borrowing the correct amount for your bathroom remodel or your kitchen expansion.
Something else to keep in mind is whether your home is paid off or if you’re carrying a balance. If your home isn’t paid off, part of your loan will automatically be used to complete your payment, and you’ll receive the remaining amount.
A home improvement loan is a standard unsecured personal loan, where you would borrow a lump sum and pay for your whole home remodel over a pre-agreed upon period. It’s unsecured because it is not dependent on any equity you may have, like your home. This is to say that if you default on your home improvement loan, the lender can’t foreclose on your home. Home improvement loans are usually pretty quick to obtain, so your remodeling project can begin earlier than with other types of loans.
Because your loan isn’t backed by an asset, the loan amounts are less than other types of loans, with the maximum amount being $50,000, on average. These loans also carry a higher interest because they are riskier for the lender. In Charlotte, this may be enough to cover a smaller bathroom remodel, minimal kitchen remodel, or to build an outdoor living area. However, you should always discuss your remodeling goals with a professional builder before seeking a home improvement loan to pay for your remodel.
A lender will consider the following financial information to determine how much of a loan they will offer:
It’s recommended to use an online calculator to determine the monthly payments that work best for your financial situation, using this above information. The loan terms are usually shorter for these loans–usually up to 12 months–meaning the payments will be higher.
A cash-out home refinance replaces your current mortgage with a larger mortgage and is based on an updated appraisal of your home. This type of loan can result in a larger loan sum to accomplish larger Charlotte remodeling projects, like a whole home remodel or adding a primary suite to your home.
Cash-out refinancing allows you to draw on your home’s equity, but will also be used to pay off your current mortgage. For example, if your home is worth $700,000 but you still owe $200,000, your home equity will be $500,000. However, a lender will also require that you maintain 20% equity in your home. In our example, 20% is $140,000, making your cash-out lump sum $340,000.
What else will a lender consider when you apply for a cash-out refinance?
The usual benefit of this type of loan is you could get a lower interest rate on your mortgage. However, with current interest rates being higher, it’s not likely that you will get a lower rate than you currently have. Other factors do affect your rate amount, like if your credit score has greatly improved since you originally took out your mortgage. Regardless, the rate will be better than obtaining a home improvement loan and you will likely have a larger sum to accomplish a more substantial remodeling project.
A benefit of a cash-out refinance could be deducting your interest payments from your taxes if the project increases your home’s value after the remodel.
Now that you’ve learned how to find out how much you’ll qualify for, finding out how much you’ll actually need for your remodel will require working with a home builder with the knowledge and experience to give you an accurate cost so you don’t borrow too little.
Hopedale Builders has been creating reinvigorated spaces for Charlotte homeowners for the past 20 years. Hopedale has built a reputation of honesty and excellent craft, creating a practice that provides our clients with the best in custom service, exceeding expectations every time. Contact Hopedale Builders to find out more about our custom home improvement process.