We know undertaking a home remodel is a big step that requires significant financial investment. Unless you’ve been planning for your remodel for a long time and have been saving up to pay for it, it may mean you need to take out a loan to pay for all or part of it.
Home renovation loans are often the smartest way for homeowners to finance their entire renovation project, but many people don’t know they even exist or how they work. It can be a daunting task knowing where to even start the process, so we’re here to help make life a little easier and walk you through the options of how you can pay for a home remodel.
Before you get started, do your homework and have open conversations with your chosen home remodeler or general contractor about how much your home remodel is going to cost. Any reputable contractor should be able to give you guidance on what you should expect to invest in your home if you use their services.
Note: Synergy Design & Construction is not affiliated with any of the following companies or services. We believe helping to inform and educate homeowners is all part of the job: if this information helps relieve some of the stress homeowners feel when it comes to thinking about a home remodel, then that makes us happy!
If you are one of the fortunate few, maybe paying for your remodel isn’t an issue. One of the questions we often receive, however, is how payment can be made. Many homeowners would like to pay by credit card so they can accrue points or other benefits on their credit card. This sounds like a great idea but, unfortunately, credit card fees are applied (usually 3%) that, in most cases, are passed on to homeowners. No fun. The same applies to debit cards and electronic check payment via Paypal Invoice. Our preferred method is the good old fashioned check.
Word of caution: never pay the entire cost of your home remodel up front. We do not even ask for 50% as a deposit. Your home renovation company or general contractor should be able to provide you with what is called a “draw schedule” that aligns payments with the completion of significant milestones on your project.
Home Improvement Loans
If you are looking for a bridge loan between your savings and the total cost of your home or you would like to borrow the entire amount, then a home improvement loan may be right for you. Home improvement loans are personal loans, not equity loans so the loan options are based on your income and creditworthiness. Companies who provide these types of loan give the money directly to the homeowner upfront, not the contractor. This makes life easier for both you and the contractor when it comes time to get paid.
There are many different home improvement loan companies out there. Companies like HFS Financial may be able to provide what you need. HFS Financial specializes in home improvement loans and what’s pretty unique about them is that is ALL they do. They only focus on these types of home loans, not mortgages, car loans or any other type of loan.
Sound interesting? You can download their brochure here.
Home Equity Loan or Home Equity Line of Credit (HELOC)
You may be in a position that you can increase your borrowing power with a loan that factors in the after-renovation value of your house. In other words, if you have paid down your mortgage to the point the value of your home exceeds the outstanding balance, you can borrow a percentage of the equity. The benefit of this approach is that it may allow you to tackle your entire home improvement wishlist at one time.
Both home equity loans and home equity lines of credit (HELOCS) are secured by the borrower’s property. Home equity loans give the borrower a lump sum upfront which the homeowner then pays back in fixed payments over the life of the loan. Like mortgages, they have a fixed interest rate.
On the other hand, HELOCS are like lines of credit which means you can use the loan as needed up to a preset credit limit. Unlike home improvement loans, HELOCS have a variable interest rate and the repayments are usually not fixed.
A home equity loan is better if you prefer fixed monthly payments and know exactly how much money you need for your home improvement project. A home equity line of credit (HELOC) might be a better fit for financial needs over time, or if you want flexible access to your equity that you can pay off quickly.
The Ferguson Team at Intercoastal Mortgage LLC headquartered in Fairfax or Sandy Spring Bank who are based in Olney, MD and service Maryland, Virginia and Washington, DC are good places to start for either a HELOC or Construction-to-Perm Loan (see below).
Construction loans are often used for homeowners who want to build a custom home or who are interested in undertaking a significant major renovation. This type of loan provides a line of credit to fund the purchase of the property and pay for the construction of the home as the work is completed. The loan then converts to a permanent mortgage upon completion of the project.
The reason a construction loan is often the best way to finance your new home project is because it uses the value of the house upon completion to determine your loan amount. This often means clients can fund more of the project through the loan. The application and approval process for a construction loan is very similar to a standard mortgage.
As a home remodeler, we cannot give financial advice on which is the right solution for you. We do, however, partner with our clients to help them navigate the various options and provide a helping hand in working out how they can pay for their dream home remodel.