So you’ve finally decided to start those renovations you’ve been dreaming of, but you don’t quite have the cash to fund your remodeling project—now what? One option for homeowners looking for ways to fund their projects is a renovation loan. But, is a loan right for you? Here’s what you should know.
What is a Renovation Loan?
Sometimes called home improvement loans or remodeling loans, renovations loans are a financing option for home buyers and owners to transfer the cost of your remodeling project into the mortgage you have on your home. This gives your payments the same interest rate that you are paying on your house payment rather than paying the rates from a credit card or store credit which tend to be higher.
It’s important to understand that renovation loans aren’t the best option for everyone – so you really have to put some thought into your final decision.
There are two main types of renovation loans—one uses the equity in your home, and the other will require a down payment to secure the loan. A loan that is secured with your home’s equity is the most common and will offer larger borrowing amounts that will fund substantially larger renovation projects.
Is a Renovation Loan The Right Choice?
It can be difficult to determine if a home renovation the right choice for you. This type of loan is technically a mortgage – and that can come with some advantages and disadvantages.
In general, to qualify for a home renovation loan, you’ll need to have at least 30% equity in your home with a loan-to-value ratio of at least 80%. In order to determine your best options, it’s important to speak with multiple lending professionals and compare loan options and funding options before you sign any contracts.
There are a few drawbacks to securing a renovation loan. Because this funding is secured by your home, failing to make the payments will put your property at risk. Failure to pay your renovation loan payments could result in foreclosure. It’s important to know that in a foreclosure, the primary mortgage lender receives the funds from the sale of the foreclosure, and the home renovation loan lender receives what is left after the primary lender is paid off. If the remaining funds aren’t enough to satisfy the renovation loan lender, you will still be responsible for the remaining debt.
Choose What’s Right for You
Making the decision to use a home renovation loan for your remodeling project is important to your financial well-being. If the loan payments are something that you can comfortably afford, and completing a large remodeling project is one of your top priorities, then a home renovation loan may be a great option for you.
However, if you plan to sell your home in the near future, your home renovation loan may negatively affect the sale. In addition, if you plan to refinance, the presence of a home renovation loan may make the refinancing process more difficult.