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An important step in any home improvement project is deciding how to pay for it. There are several ways to finance a home remodel, including options that use the equity you’ve built up in your home and non-equity options like personal loans and credit cards.
How To Finance A Home Purchase And Renovation
Borrowing against home equity means either replacing your current mortgage or getting a second home loan and using the money to pay for the remodeling. This type of financing often comes with single-digit interest rates, and interest paid on home equity loans or lines of credit is taxable if used for home improvements.
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With equity financing, the lender requires a home appraisal, and you may have to pay closing costs. It also uses your home as collateral, which means the lender can take your house if you don’t make payments.
A HELOC is a line of credit that you draw from as needed. You only pay interest on the amount you borrow.
HELOC amounts can be up to 85% of the value of your home less what you owe on your mortgage. Interest rates are usually variable, meaning monthly payments vary as the rate changes. You usually have 10 years to spend the money from a HELOC and 20 years after that to repay the balance.
When it’s better: The flexibility to withdraw money as you need it makes a HELOC ideal if you don’t know exactly how much the renovation will cost.
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Like a HELOC, a home equity loan allows you to borrow up to about 85% of the value of your home less what you currently owe. The difference is that you receive the money in a lump sum and repay over a period which is often 15 years or less. These loans have fixed interest rates and monthly payments.
When it’s best: Because home equity loans are fully funded at one time, they’re best when you know the cost of your renovation project.
A cash-out refinance replaces your current mortgage with a larger one. You receive the difference between the current mortgage balance and the new, larger loan in cash, which you will use to finance your renovation.
When it’s better: A cash-out refinance works best if you need a large loan to renovate a home you plan to stay in long-term. Ideally, the new mortgage has a lower interest rate than your existing home loan.
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Jovan Johnson, an Atlanta-area certified financial planner, says he sets aside money each month for future home improvement projects and necessary repairs.
For do-it-yourself projects and other projects that don’t require full payment upfront, splitting payments during the renovation helps fit the project into your budget.
When it’s better: Use cash when doing so won’t interfere with other financial goals or exceed your monthly budget.
Unsecured personal loans can help homeowners finance a project quickly. Most lenders can fund a loan within a week, unlike home equity financing, which involves time-consuming underwriting and appraisal processes.
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Rates on personal loans range from 6% to 36%, which is higher than most home equity options but lower than some credit cards. Home improvement loans are for borrowers with bad credit (scores below 630), but the lowest rates are reserved for good and excellent credit borrowers.
The repayment terms on most personal loans are between two and seven years. A shorter term raises your monthly payments, while longer terms cost more in total interest.
Many online lenders offer pre-qualification to let borrowers see their potential rate, loan amount and monthly payment. Since these loans come in a lump sum and are repaid in fixed amounts, you can plan for them in your monthly budget.
When it’s best: Because personal loans are funded quickly, they’re good options for emergency repairs or projects you want to get started quickly. They can also cover larger projects if borrowing versus equity is not an option.
Smart Ways To Use Your Home Equity For Remodeling
For small home improvements, consider a 0% APR credit card that you can pay off during the interest-free period, usually 15 to 18 months. You will need good or excellent credit (a score of 690 or higher) to qualify for these cards.
Some cards give rewards on certain purchases, including home improvement costs. Retail cards also offer financing or special promotions, which can make sense if you buy most of your supplies from the same store.
When it’s better: Using credit cards can help you accomplish smaller or short-term DIY projects that don’t exceed a few thousand dollars.
The government offers Title 1 loans for qualified borrowers who want to make specific updates to their home, including buying appliances, making your home more accessible or improving its energy efficiency.
Home Renovation Loans
You can borrow up to $25,000 for a single-family home, and repayment terms typically range from six months to 20 years.
Title 1 loans over $7,500 require your home as collateral. You must also be in the home for 90 days or more before you can borrow.
Not all lenders offer government loans. Search the lender list at Housing and Urban Development for one that lends in your state.
When is it better: If your project qualifies for this type of loan, it can pay for all or part of the project.
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Annie Millerbernd is a personal loan writer. Her work has appeared in The Associated Press and USA Today. Read more
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If your perfect home doesn’t exist, why not build it? A home construction loan can finance a way to either add on to an existing property to make it suitable for you and your family – or build the perfect place from the ground up.
A home construction loan for an individual finances the construction costs of a personal residential property. It can be used to pay for the land, labour, materials and services, and there are several types you can choose from.
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A construction loan only covers the cost of building the home for the time it takes to build. Once the home is built, the entire loan amount is usually due. Borrowers could pay the amount by paying cash or taking out a separate mortgage.
A construction-to-permanent loan changes from a construction-only loan to a traditional mortgage once the home is built. The loan allows the buyer to deal with just one round of applications and paperwork, and have the advantage of easily transitioning to a mortgage at the end of the home’s construction.
A renovation loan is a type of construction loan that finances the cost of major improvements to an existing home, such as adding several rooms, a garage or an in-ground swimming pool. A rehabilitation loan also finances major changes to a home, but these changes focus on making a dilapidated home fit to live in.
If you are a general contractor or professional builder and want to build your home, an owner-builder construction loan could finance your project.
Using Construction Loans For Homebuilding And Renovations
Closing loan: A closing loan is a type of long-term financing used to pay a builder. In this case, the closing loan would be a mortgage that comes after a construction loan.
Land loan: A land loan only covers the cost of buying land that does not have residential structures on it. It can be
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