Best Renovation Loans of September 2021

A personal loan is not your only path to home renovation. Here are some alternatives:

Cash: Cash is the best way to finance improvement projects, provided you have extra funds. Spending cash from your savings account means you know precisely how much you can afford to spend. Most importantly, it means you don’t have any new debt.

Pay as you go: If you cannot afford to pay for an entire home renovation project at once, pay as you go. Let’s say you abhor your current bathroom and want a total remodel. Perhaps you retile the floors when the funds are available. Months later, you paint the cabinets and replace the hardware. Doing a little at a time allows you to avoid more debt. In addition, taking your time gives you space to think about your renovations in detail.

Credit card: Using a credit card for a small renovation or home repair makes sense only if you qualify for a credit card with a 0% promotional APR. It’s essential to remember how long the promotion lasts (typically 12 to 18 months). The moment the promotion expires, the interest rate on the card will revert to its regular rate.

Home equity loan: This type of loan uses the collateral in your home to finance your loan. A home equity loan typically offers a lower interest rate. That’s because lenders know that if you fail to make payments they can repossess your home, sell it, and recoup their losses.

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Home equity line of credit (HELOC): Another type of secured loan is a HELOC. What sets a HELOC apart from a home equity loan is that a HELOC allows a borrower to open a revolving line of credit and tap into home equity as needed. Once you receive loan approval, you’re offered a borrowing limit. Say you borrow $40,000. Once that money is repaid, you can borrow that amount again until the loan term ends. One thing to keep in mind is that your payment can change, based on how much you borrow at any given time.

Cash-out refinance: If you want to make home renovations while taking advantage of current low mortgage refinance interest rates, a cash-out refinance is a viable option. Imagine that your home is worth $300,000, but you only owe $150,000. That means you have $150,000 in home equity. Say your home needs $50,000 in renovations. You refinance the mortgage at today’s low rate and pull out $50,000 to complete the projects around your house. Keep in mind that you now have $50,000 less in home equity, but you didn’t go deep in debt to improve your home.

HomeStyle® Renovation loan: A HomeStyle® loan is backed by the federal government through the Fannie Mae program. It’s available to new buyers and to homeowners who would like to refinance a mortgage and add enough to the principal to make home renovations.

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VA loan: Similar to the home improvement mortgage loans mentioned, the Veteran’s Administration now backs the VA renovation loan, incorporating the cost of home improvements into the primary loan. This VA loan covers both the cost of financing (or refinancing) a home and upgrades.

FHA 203k loan: Roughly speaking, the 203k loan is the FHA’s version of the HomeStyle® Renovation loan or VA loan with home renovation capabilities. With as little as 3.5% down, an FHA borrower can take out enough money to purchase a home and make renovations using one simple mortgage.

Whether your interest in renovation financing has to do with creating your dream home or simply making sure your house functions as it should, you are wise to investigate your options. Take a look at the full costs of several types of renovation loans. In addition to the annual percentage rate you’re charged, don’t forget to factor in costs like the origination fee (if there is one) and closing costs. Finally, be sure you can easily afford the repayment term included in your loan offer.

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