Financing a home renovation involves securing funds to pay for your property’s upgrades, repairs, or improvements. With significant expenses often attached to these upgrades, you need to explore the best financing options. To fund these projects, many homeowners search for common options like construction, home equity, or FHA home improvement loans.
However, there’s an alternative that most people aren’t aware of: RenoFi loans. RenoFi loans can often be a better solution than traditional financing options, especially for more extensive renovations. This guide will explore the most common options and a better alternative: RenoFi loans, which might be the smartest way to finance large-scale renovations.
Look at Your Current Financial Situation
Before we get into your home renovation loan options, let’s take a closer look at your current financial standing and see what impacts your chances at one of the loan options we discuss.
Review Your Credit Report and Score
To get the lowest rates possible and to determine your loan eligibility, lenders will look at your credit reports and scores. They want to see a good payment history and no late payments, for example. Before applying for any kind of financing, you might want to see what can be done to raise your credit scores first.
Calculate Your Debt-to-Income
A debt-to-income (DTI) ratio is one factor lenders use to determine if you can make monthly payments on the loan. Your debt and mortgage should be below 36% of your gross income each year.
1. Traditional Construction Loans
When planning an extensive renovation, most homeowners consider construction loans. These loans are designed specifically to fund the building or renovation of a home.
However, construction loans can be complex. They require a strict draw schedule and inspections at various stages and come with higher interest rates. In addition, you may refinance your existing mortgage, thus giving up a potentially lower interest rate.
For many homeowners, this isn’t ideal. Most are happy with their current mortgage rate or don’t want the hassle of inspections and draw schedules. In such a case, a RenoFi loan might be a better fit.
RenoFi loans allow you to borrow based on the future value of your home after renovations are complete without the need for a refinance. They also don’t require the same level of oversight and are far more flexible, making them a more attractive option for homeowners and contractors.
2. Home Equity Line of Credit (HELOC)
A HELOC is like a home equity loan but functions more like a credit card. Instead of receiving a lump sum, a HELOC gives you access to a credit line based on your home’s current equity. Hence, you can borrow from this line as needed over a draw period, typically 10 years, and pay interest only on what you borrow.
HELOCs are great for ongoing or smaller projects, like renovating a bathroom or installing new flooring. However, like home equity loans, a HELOC’s borrowing power depends on your home’s current value, which might not be enough for large-scale projects.
Let’s use an example of borrowing $150,000 for renovations to increase the value of your home by $150,000:
Scenario 1 (New Home Purchase):
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
RenoFi HELOCs provide a line of credit secured by your current home.
Example RenoFi HELOC Terms:
Years to use credit line: 10 Years
- Interest Only Period: 10 Years
Credit Amount: $195,000
Repayment Term: 15 years
In this example, you’ll have 10 years to use your credit of $195,000. Within those 10 years, just like a credit card, if you borrow against the credit line and pay it back, you will not pay interest.
However, for anything borrowed against your credit, that you do not pay off immediately, you will only pay interest during the first 10 years and then interest and principal after year 10.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Line of Credit Amount:
Example Home Equity Line of Credit % of Home Price: 80%
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
3. Cash-Out Refinance
A cash-out refinance allows you to refinance your existing mortgage for a larger loan and use the difference to fund your renovation. While this can be a good option in some cases, there are significant downsides.
First, you might lose a favorable interest rate on your current mortgage, especially if rates have risen since you first purchased your home. Secondly, closing costs and fees can make this option more expensive in the long run.
Fortunately, you can explore RenoFi loans that don’t require you to refinance your primary mortgage. This means you can keep your existing interest rate intact. RenoFi loans also offer significantly more borrowing power by using the future value of your home after renovations. Therefore, with RenoFi loans, you can avoid the additional costs associated with refinancing.
Using the same example above, let’s see how RenoFi Cash-Out Refinance helps:
Scenario 1 (New Home Purchase):
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Cash Out Refinance Amount)
By writing a loan against your equity in the after-renovation value of your home, RenoFi allows you to borrow funds for renovation against $750,000 versus $600,000. This increases your loan amount from $0 to $195,000, allowing you to borrow infinitely more than a traditional Cash Out Refinance for renovations.
This allows you to receive the $150,000 you were looking for with house renovations and even offer $45,000 above what you were asking for in case you needed more money for renovations.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Cash Out Refinance Amount:
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Cash Out Refinance Amount)
Using a RenoFi Cash Out Refinance, you have increased your loan amount from $60,000 to $255,000 because the RenoFi loan is written against the assessed after renovation value (ARV) of $750,000.
Again in this scenario, using RenoFi you are able to borrow significantly more than traditional loan options and borrow the $150,000 you are looking for to make your renovations and even have the option to receive $105,000 on top of the $150,000.
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
4. FHA Home Improvement Loans
Another option that some homeowners consider is the FHA home improvement loan. These loans are backed by the Federal Housing Administration (FHA), making them a good choice for people with lower credit scores or limited down payments. Although they provide renovation funds, FHA loans have strict requirements and limit the amount you can borrow.
Moreover, when taking an FHA loan, you must refinance your current mortgage. This can disadvantage homeowners who want to keep their existing loan terms. Additionally, FHA loans have a more involved inspection and approval process, which can slow down your renovation.
Government-backed loans like this often offer competitive interest rates compared to more conventional loan options. However, there might be a more complex application process and additional costs like higher upfront fees or mortgage insurance premiums that will add to the overall costs of these loans.
5. VA Renovation Loans
A VA renovation loan allows eligible veterans and active-duty service members to finance home renovations and improvements. For this loan type, you will need a valid Certificate of Eligibility alongside your creditworthiness.
The amount you can borrow typically depends on the property’s appraised value and the extent of the renovations you plan to do. Most VA loans don’t require any kind of down payment either, which is a big advantage for those looking to finance major home renovations like roofing, plumbing, electrical work, or energy-efficient upgrades.
6. Personal Loans
If you have smaller projects on your list, then consider a personal loan. These loans are usually unsecured and don’t require any kind of collateral. Most personal loans also come with fixed interest rates, so there will be more predictable loan payments throughout the life of the loan. However, if you have larger renovation projects to do, this might not be a suitable option. Most personal loans range between $1000 and $50,000.
However, you can also choose to get a personal loan through RenoFi. Unlike traditional personal loan amounts, you can get up to $100,000 with a RenoFi personal loan and have a loan term of up to 20 years with more competitive rates.
7. Savings
There are also some pros and cons when you choose to fund your home renovations from your savings. For example, no debt. Since you are paying with funds you have already saved, you can avoid additional debt, and there will be no loans or interest payments. You also maintain full ownership of your home without the risk of foreclosure, and you can prioritize the renovations on your list without any lender restrictions.
8. Credit Cards
If you have short-term projects, credit cards may be a funding option to consider. However, credit cards typically have higher interest rates if the debt isn’t paid off quickly, and there is the potential for overspending. On the plus side, you will have immediate access to the funds, and many credit cards come with rewards and cash-back opportunities you can take advantage of.
Financing Emergency Home Repairs
If you need to maintain the safety and comfort of your home, you may need to fund some emergency home repairs. In this case, you may have an emergency savings fund you can access or maybe a home warranty.
If you have a home warranty, it can cover emergency repairs while reducing some of your out-of-pocket costs. This can save you some money on repairs or renovations but you might find limited coverage that won’t fully cover everything.
With an emergency savings fund, you can cover the unexpected costs without taking on more debt. However, you will also deplete your savings and have to build them back up to cover future emergencies.
Why RenoFi Is the Smartest Way to Finance Your Home Renovation
When it comes to financing a home renovation, traditional options like construction, home equity, and FHA home improvement loans often come with significant limitations. These include lower borrowing power, complex approval processes, and the need to refinance your primary mortgage. If you are looking for a better alternative, RenoFi loans are the smartest way to finance a renovation.
Here’s why more people are turning to RenoFi:
- Increased Borrowing Power: Traditional loans often limit you to borrowing up to 80% of your current home value. Alternatively, RenoFi allows you to borrow up to 125% of your home’s current value or 90% of its future value, whichever is lower. This means more money for your renovation project without the need to refinance.
- No Need to Refinance: With RenoFi loans, you can keep your existing mortgage and its low rate intact while accessing funds for your renovation. This is a huge benefit if you’re locked into a favorable rate and don’t want to refinance.
- Streamlined Process: Unlike other loans, RenoFi loans don’t require complicated draw schedules and inspections. This makes it easier to start and complete your project on time.
Conclusion
Choosing the right home renovation loan can make or break your project. While traditional loans like HELOCs, personal, and FHA 203(k) loans have their place, they often come with limitations that can restrict your renovation plans. But RenoFi loans give homeowners a unique and flexible alternative.
By leveraging your home’s after-renovation value, RenoFi allows you to borrow more without the need to refinance your existing mortgage or deal with complex draw schedules and inspections. Therefore, if you are a homeowner looking to maximize your renovation potential, RenoFi loans are the best choice.
Unlike traditional loans, which are based on your current home value or require you to refinance, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.
Explore your RenoFi loan options here.
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