Financing renovations and repairs
There are several ways to approach financing for renovations and repairs, each with its own advantages and disadvantages. Mark Wells of Preferred Financial Services provides answers to often-asked questions about how mortgage financing can be put to work for those projects.
I have some general repairs that will cost a little under $10,000 to complete. What is the best financing available for this? If there is some equity in your home, a small home-equity line is the cheapest and simplest mortgage to obtain. An equity line provides you with a line of credit you can draw on as you need to, to fund the repairs as you get them done.
Are there any disadvantages to a home equity line? The only disadvantage is that the interest rate is variable (generally based on the prime rate plus a small margin). That means that your payment might change down the road. However, for a smaller loan, the rate change does not produce a large payment increase. For instance on a $20,000 loan, a 1 percent rate increase would only change your payment by $10 per month.
I want to do some additions and renovations to my home that will cost $50,000 to $70,000 to complete. Should I still use a home equity line for this? If you have sufficient equity in your home as it currently is, without considering the increase in value the renovations will bring, then the easiest and least expensive way to fund your renovations would be a home equity line. Once you have completed the renovations, you can wrap your first mortgage and equity line into a new single loan by refinancing based on the home’s renovated value. Or you can keep both your first mortgage and the new equity line in place and make payments on both loans each month.
I don’t think I have much equity in my house, but I know it will be worth a lot more when the renovations and additions are finished. How do I get financing for this when there is no equity there? This is the more costly approach to a project, but is often necessitated by the current value of the home. Where there is not enough equity to cash out money for the improvements, you can obtain a construction-type renovation loan based on the future value of the home rather than the present value. This is called a “subject to” appraisal, where the appraiser assigns a value to the home as though the renovations are already finished. Then you can borrow against the future value with a construction line of credit.
What do I do when I am finished? Does the construction loan become a permanent one? Not in most cases. When you are finished, you refinance the construction loan into a permanent, fixed-rate loan.
I welcome questions and comments and am happy to discuss your renovation or addition project to provide you advice for the best financing approach.
I can be reached at 864-235-9596 or via email at Mark@TheGreatestRates.com.
Or Text Me Now! 864-430-4856
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