At a certain point, home renovations and improvements become necessary. Having kids, for instance, is a good reason to do so. You may wish to upgrade your home but lack the funds or the necessary equity in your home. A renovation refinance loan may be right for you.
What is a Renovation Refinance Loan?
When you refinance through a renovation loan, such as the Fannie Mae HomeStyle and the FHA 203(k) mortgage loans, you incorporate expenses related to your renovation into a new loan. The amount lent to you will depend on the estimated cost of renovations and your home’s current market value.
Let’s say your home’s value is $200,000 and you require $40,000 for renovations. Your new mortgage amount will then be $240,000. You can likewise incorporate closing costs in the renovation refinance loan.
Qualifying for Renovation Loans
To qualify for a refinance renovation loan, you need a good credit rating and debt-to-income (DTI) ratio, similar to when you apply for any other mortgage. Sandy lending companies have different requirements for the credit scores.
The interest rates for renovation loan options are around .25% to 1% higher than standard mortgages. The reason for this is that lenders shoulder extra risk. Some lenders may also incorporate the interest rate of the loan’s first six months to your overall mortgage, which means you will not begin making payments until construction is complete.
This higher interest rate, however, is for the whole mortgage balance, which includes the renovation expenses. Some borrowers choose to refinance into a lower interest rate once all renovation work is complete.
Renovation Refinance Loan Process
To begin, estimate the overall cost of your home renovation and find a lender to work with. You will likewise require contractor bids for the final mortgage approval.
Note that you won’t be able to change your mortgage amount with a renovation refinance loan. Because of this, you must work with a great contractor who’ll make sure everything goes as planned, since all renovation work must be approved by your lender and followed through.
When you’re approved, your lender will send your contractor the funds on a predetermined schedule until the project’s completion. The final payments will be released once all renovation work has been completed and thoroughly inspected.
When thinking about making those home renovations, take the time to weigh your options. Don’t rush your decision to apply for a mortgage and which mortgage company to consult with.