A house repair loan is a sensible decision for financing necessary renovations, remodels, and upgrades to your property. These repair or renovation loans help considerably boost the house’s resale value, comfort, and quality without depleting your life savings.
However, navigating the world of house repair loans is challenging and requires understanding the qualification rules for each type. In this guide, we will examine the five primary renovation loan options available and discuss the factors you need to consider to help you select a program that aligns with your current situation and the project’s vision.
Understanding House Repair Loans
Home renovations, depending on the scope and size of the project, can be quite costly to pay out of pocket. Home renovation loans efficiently fund upgrades and you pay those funds back over an agreed-upon timeframe.
Interest rates, credit scores, and eligibility requirements can influence your decision when selecting the right loan type. Once your loan request has been approved, you must comply with the guidelines and limitations.
It is important to assess the project’s needs and constraints before selecting a specific house repair loan. These include details such as defining the project’s scope and estimating its cost. When calculating the total cost, keep in mind the contractor’s bids for materials, permits, labor, and contingencies to prepare for possible overruns in the future.
Lastly, determine the budget for your projects by evaluating your current financial capabilities. Consider your monthly expenses and income and decide how much you can afford to repay.
Are There Different Types of House Repair Loans?
When it comes to these types of loans, there are several options available. A thorough understanding of the benefits and limitations of each type is crucial in the selection process. That said, here’s a rundown of the primary types of house repair loans:
1. Home Equity Loan
Home equity loans are among the most popular financing methods for large-scale renovation projects. These loans are funded by the equity of your main property, which is calculated after subtracting the outstanding balance on the existing mortgage from its total value. This type of loan allows you to receive a lump sum payment upfront.
Home equity loans require you to put your house up as collateral. By doing so, lenders offer a typically lower interest rate than a personal loan and an extended repayment period (between 5 to 30 years). It is also possible to write off the interest during tax time for cases where the funds are utilized for home upgrades.
To apply for a home equity loan, consult online lenders, credit unions, or your bank. The specific terms and interest rates of the funds depend on your credit score, but equity loans generally allow you to borrow as much as 85% of the total home’s equity.
This financing option is ideal for borrowers who have built up plenty of home equity and want to work on major, one-time home remodels. With fixed interest rates, upfront amounts, low closing costs, and monthly payments, home equity loans help ease the budgeting process.
However, most credit unions and banks charge origination fees and other closing costs, which add to the overall expenses. Additionally, since the amount is dispersed in one lump sum, the improvement project’s budget needs to be accurate.
2. Home Equity Lines of Credit (HELOC)
Home equity lines of credit (HELOC) are another way to fund an ongoing renovation project with the help of your home’s equity. While a HELOC, similar to a home equity loan, also puts up your house as collateral, it operates slightly differently than the former.
A HELOC functions more like a credit card, allowing you to draw an amount up to your pre-approved limit as needed.
Factors such as your credit score, property value, and current income are pivotal in determining the interest rate and maximum amount you can borrow. Generally, a HELOC boasts increasingly low interest rates and offers flexibility by letting you draw from the credit line over the draw period, which usually lasts about ten years.
Simply put, a HELOC is an excellent strategy for working on one or more less expensive ongoing projects that have a long-term completion time. With minimal to no closing costs, a revolving balance, and adjustable rates, monthly payments are also kept low.
Financing Your Home Repairs With a RenoFi Loan
RenoFi Loans allow you to borrow significantly more than a typical home equity line of credit. For example, suppose your home is currently valued at $500,000, and you have an outstanding mortgage of $400,000. You expect the property’s after-renovation value to be approximately $640,000. The current 80% loan-to-value ratio (LTV) makes it impossible to fund the renovation with a standard equity loan.
On the other hand, RenoFi loans allow you to borrow up to 150% or 90% LTV by focusing more on the property’s after-renovation value. In this scenario, you can borrow as much as $176,000 and successfully breathe life into your renovation project.
At the same time, remember to look out for any ongoing penalties or fees involved and stay updated in case the lender makes any modifications to the repayment terms.
Get started with your RenoFi loan here3. Cash-Out Refinancing
Cash-out refinance is one of the most common strategies for funding a major remodeling project. It involves refinancing the existing mortgage for more than you owe and pocketing the extra difference for improvements.
Like home equity loans, a cash-out refinance also provides you with borrowed money all at once. This finance option has a fixed interest rate and a repayment period of up to 30 years. However, you cannot cash out an amount greater than 80% of the property’s market value.
You can qualify for cash-out refinancing with extra build-up home equity and a good credit score. It is an excellent option for not only funding costly renovations but also for debt consolidation and investment since there are no restrictions on how you can use the funds..
With a cash-out refinance, you can easily lower the repayment period and the interest rate depending on your unique situation. But bear in mind that high closing costs are applied to the entire loan amount rather than just the cash-outs. For this reason, you want to make sure that your interest rate is considerably low so you can really benefit from this type of refinancing.
4. FHA 203(k) Rehab Loans
An FHA loan, short for Federal Housing Administration, is a government-backed loan designed to cover the expenses of purchasing and repairing houses. This loan type rolls the cost of the property and improvements into a single loan.
An FHA 203(k) is the most suitable financing option for owners with not-so-stellar credit or buyers with a low down payment. With a 203(k) rehab loan, you can buy a fixer-upper, condominium unit, or a manufactured home.
With no income limit and low credit score requirements, the qualification process for these loans is significantly more lenient than other home equity alternatives. Once approved, you can pick a fixed-rate mortgage (15 or 30-year period) or an adjustable-rate mortgage (ARM).
Additionally, FHA 203(k) loans come in limited and standard options. The limited 203(k) loan deals with non-structural repairs and minor improvements totaling under $35,000. The standard 203(k) loan has a more complex application process and lets you finance major rehabilitation work and renovations exceeding $35,000.
However, FHA rehab funds are restricted to older homes and fixer-uppers. Its rules also prohibit using cash on specific house improvement projects, and closing these loans can take a long time.
5. Personal Loans
Personal loans are the most straightforward, quickest, and most convenient way to carry out smaller emergency house repairs. Since these loans are unsecured and don’t require that you use your house as collateral, they can be approved much faster than other loan types.
Various online lenders offer personal loans with repayment terms of one to seven years. Generally, the interest rate for unsecured repair loans is higher and worse if you have a negative credit score.
Personal loans are provided as a lump sum, thereby offering relatively less flexibility than a HELOC or a credit card. This funding strategy is perfect if you don’t have sufficient equity in your home to qualify for HELOC and are looking to work on a mid or small-sized project.
Emergency house repairs, such as problems with the HVAC system or window replacements, are ideal scenarios for personal loans, given their instant accessibility to the funds you need.
However, like other renovation loans, personal loans are also accompanied by some unfavorable policies. These include low borrowing limits, high interest rates, closing costs, penalty prepayment, and expensive late fees.
Comparing House Repair Loans
Familiarizing yourself with the house repair loans available is a great way to kickstart your home renovation journey. Once you have gained an understanding of the advantages and drawbacks of each type of home repair loan, it’s time to consider and compare the financing options while keeping some key factors in mind. These include:
Borrowing Power
When comparing house repair loans, you also want to make sure you fully understand your borrowing power. This is the maximum amount you can secure from a lender. It is often determined by factors like your income, credit score, debt-to-income ratio (DTI), and the value of your home.
RenoFi loans are unique because they are based on the after-renovation value of your home, which allows for a significantly higher borrowing limit compared to traditional home repair loans. They let you borrow as much as 150% LTV and 90% LTV as opposed to the 80% LTV of the standard home loans, which focus more on the existing value of the property.
With Renofi loans, you can borrow a greater sum that is determined by the expected property value after renovation.
Fees and Interest Rate
Most lenders and banks charge a specific origination fee for the approved renovation loan. Compare various financing options based on origination fees and other expenses such as prepayment and late charges.
Next, consider whether the loan uses fixed or variable interest rates. Fixed rates are well suited for steady and predictable payments. Meanwhile, only opt for variable interest rates if you expect the rates to stay stable or drop with time.
Loan Terms
Examine the loan terms based on the repayment period and monthly payments. A longer repayment period usually means low monthly payments but at high interest rates.
Alternatively, a shorter period has higher monthly cash-outs but low interest rates. Ensure that your selected option strikes the right balance between affordability and savings and that the monthly payments don’t strain your finances.
Ease of Application
Every house repair loan requires the borrower to fill in an application to avail the funds. Pay attention to the eligibility criteria of a financing option and see if you meet the credit score and equity requirements. Next, discuss the application’s approximate processing time to verify that it coordinates with the project’s schedule.
Lender Reputation
It is important to assess the lender’s reputation. Read what their clients say and whether they have an overall positive, negative, or mixed rating. This will help you better gauge their credibility overall.
Reliable lenders also offer responsive and helpful customer care services. Decide on a lender once you are sure they have a positive reputation and will be there to cater to your needs.
Conclusion
House repair loans, if approached with diligence and care, can bring your remodeling blueprints to life. Start by researching the best financing option and consulting a trustworthy lender with the lowest interest rates.
This is where RenoFi comes in. RenoFi loans are the smartest way to finance your home repair projects. Our loans are based on the property’s after-renovation value. Standard loans focus more on the current value and demand that you refinance the primary mortgage.
RenoFi allows you to borrow up to 11 times more than a standard HELOC, get low monthly payments, and stick with the low rate on your first mortgage! Our team is dedicated to providing the best way to finance a house repair project and ensuring that the final product lives up to your vision.
Learn more about the borrowing options available for your specific situation and get started with your RenoFi loan right away!
