Families sometimes struggle to find the perfect home with enough space and amenities in the perfect neighborhood. The financial constraints of growing families can limit your real estate options to undersized homes in less-than-ideal locations.
That’s why everyday people are turning to a home renovation loan that allows them to consider larger, lower-priced homes in need of repair. A renovation loan could prove invaluable in terms of purchasing a home in a favorable area at a fraction of the cost. If you rank among the many people on a budget, understanding how a renovation loan works can help you make informed decisions on which home to buy and how to finance home improvements.
The driving reason people secure a home renovation loan is to improve their quality of life in their prospective new home through home renovations, improvements, and upgrades as well as to increase the overall property value. People buying residential properties, that may not be an entirely suitable living environment, often consider a home renovation loan to make structural or cosmetic enhancements before occupying the space. Lenders may allow you to borrow toward the improvements and effectively start construction promptly after the closing.
Renovation loans are typically calculated based on the estimated value of a home after the proposed improvements are completed. This aspect makes them preferred resources because the future property value will increase once the renovations are complete, even though the fair market value remains relatively lower.
Homeowners would also be well served to understand the differences between a renovation loan and products that sound similar, such as home improvement loans. Although the terms tend to be used interchangeably, the loan terms, features, and requirements are very different. It isn’t uncommon for everyday people to mistake one for another and end up with more restrictions or a higher rate than they were bargaining for.
One way to distinguish a home renovation loan from other home improvement loan options is the future property value aspect. Few, if any, other loan products factor the post-renovation value estimate into your borrowing bandwidth. These rank among the popular available home renovation loan options.
Home renovation loans rank among the go-to funding resources for everyday people purchasing properties that require improvements and repairs. But like any product, a renovation loan has pros and cons to consider.
Renovation loans rank among the most popular options because homeowners can re-imagine a home to their liking immediately. Borrowers will not require a second mortgage or line of credit payment on top of the monthly payment. And given most homebuyers anticipate making improvements anyway, a renovation loan effectively kills two birds with one stone. If you are interested in a property that requires work, these are the pros to consider.
It’s essential to conduct substantial due diligence and double-check your calculations. One of the common missteps homebuyers sometimes make is over-estimating the value after renovations have been completed. These rank among the potential cons to consider.
Families should always walk into a borrowing situation with their eyes wide open. Issues that do not get the necessary attention and thought they deserve can emerge as problems later. It may be worthwhile to ask yourself the following questions to ensure you are prepared to purchase a fixer-upper.
Houses in need of upgrades often wallow on the market for a reason. Home renovation loans require extra time and effort. Moving in is also predicated on contractors completing work. Consider your timeline and what you will do if construction falls behind schedule.
Applicants who served in the military may be eligible for VA loans. VA loans have few requirements and offer competitive rates and low upfront costs. Non-service people can access government-backed FHA loans. Conventional loans are open to qualified borrowers, typically require higher credit scores, and offer lower interest rates.
When purchasing a fixer-upper, buyers may want to make sure they have enough cash tucked away for living expenses, up-front fees, a down payment, and costs associated with due diligence. It may be prudent to budget an additional 10 percent to be safe.
Although you may have a friend or family member qualified to make the necessary upgrades, lenders work almost exclusively with licensed and insured contractors. Applying with paperwork from a non-certified outfit will likely cause a rejection.
A home renovation loan remains a product of choice for people who want to buy a fixer-upper and rapidly increase property values. But not everyone may feel that this product is the perfect fit for how you imagined homeownership. These products offer financing alternatives and may fit your needs, depending on your financial situation and goals.
Home improvement loans are a great financing alternative if you are looking to pay for an upcoming home improvement project. They are unsecured personal loans typically offering a fixed rate and a fixed term for repayment. They do not use your home as collateral which may mean they feature a higher interest rate, but you also have peace of mind knowing your home is not on the line. They also offer a much shorter loan approval process. Some local credit unions may approve your loan in as little as 24 hours. Be on the lookout for lenders that do not charge closing costs. These lenders do exist, and that means extra money in your pocket.
Want to see how Carolina Trust FCU can help? Check out our Home Smart Loan, with low loan rates and flexible terms it may be a good option.
A home equity line of credit, or heloc, operates as a revolving line of credit like credit cards where you only make payments on the amount you have borrowed. It offers a variable interest rate based on the Federal Reserve’s prime rate and is borrowed against the equity in the home. It acts like a second mortgage. Review “5 pros and cons of using a HELOC for Home Improvements” to see if a HELOC may work for your situation.
A home equity loan is like a HELOC in that it’s borrowed against the equity in your home, but it differs by offering a fixed payment rate and term. Interested in learning more about home equity loans? Check out how a home equity loan works in our, "How long does it take to get a home Equity Loan" blog.
This product replaces an existing mortgagee and allows homeowners to borrow more than they currently owe on the property.
Homeowners enjoy wide-reaching loan options, and renovation loans can be perfect when purchasing a property that requires work. By adding up the purchase price and renovation costs, you can arrive at a figure that clarifies your borrowing needs. That figure must also be weighed against the estimated value upon completion. If the math works, a home renovation loan can be the perfect product to restore the fixer-upper you have in mind.
Speak with a loan expert at your local credit union to discover what the right solution may be for you and your financial situation to help turn your fixer-upper into your dream home.
For more information on home renovation loans and ideas for which projects will increase your home's value, review our "Home Improvements Made Easy: Your Complete Guide to Using Home Improvement Loans the Right Way".