Today, many homeowners are staying put and renovating their existing homes since it is so hard to compete in the market. With patience and a some guts a renovation can be the right thing to do. Know your own personality and pain threshold as a renovation is a wonderful but obtrusive way to upgrade. Many homeowners move out for 6 months to a year to avoid the stress and inconvenience. I recently saw a home under renovation that had a mobile home in the driveway. They had 4 children! Imagine that. This blog is about financing options and paying for the great ideas you have to renovate your home.
As mentioned above, there are many options for covering the remodel costs of a complete home renovation. Below are the most common ones for your consideration:
FHA 203k loan
If you're just moving into the home you plan to remodel, consider using an FHA 203k home improvement loan. A 203k loan allows you to wrap the cost of repairs up in your mortgage, meaning you only have to worry about making one loan payment. On the plus side, these loans often offer lower interest rates than other types of financing. However, they are also highly regulated, and there are specifications for how money must be spent.
A cash-out refinance involves refinancing your existing home loan and taking out more money than you currently owe on your home. The excess money from the loan is given to you in cash and can be put toward anything you'd like, including your new kitchen renovation or bathroom remodel.
Refinancing your loan also typically offers better interest rates than other financing options. However, it comes with a big caveat. Since your home will be used as collateral when you do a cash-out refinance, if you become unable to make the monthly payments on your renovation loan, you could be at risk for foreclosure.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) works more similarly to a credit card than an installment loan like you'd find with a cash-out refinance. In this case, you'll be able to borrow money against the equity in your home, as needed, up to a limit predetermined by your lender.
That flexibility is what makes HELOCs a particularly good option as a renovation loan. However, like the 203k loan and cash-out refinancing, it also comes with a potential foreclosure risk if you stop making your monthly payments.
In contrast, personal loans are unsecured, which means they're not tied to an asset like your home. Instead, your approval for the loan is based on personal factors like your debt-to-income ratio and credit score. That said, a personal loan will typically have the highest interest rates out of all the options on this list.
Tips for saving on home renovation costs
Choose your materials carefully
Materials are usually the most variable expense in a whole home remodel. Using all high-end materials can add thousands of dollars to your final costs. If you're trying to stick to a budget while renovating, your best bet is to choose where to splurge and where to save. As a rule of thumb, it's best to invest the most money in each room's focal point features, like high-end appliances, and to choose midrange items everywhere else.
Bear in mind that high-priced items are often priced by the square foot, so you'll also want to keep the size of the room in mind when you're creating your budget. Generally, the more square footage there is, the more you can expect the material to cost.