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Is a Renovation Construction Mortgage Loan right for me?

If you want to renovate or remodel your home but don’t have the cash to pay for it out of pocket, home renovation loans are a smart way to get your home improvement project funded and on track. Whether you’re adding a new room to your home, redoing your kitchen, or replacing your roof, home renovation loans can help you finance the cost of your upgrades.

There are several types of home renovation loans to choose from. Many of them require a minimum credit score and either a minimum amount of home equity in your home or a minimum down payment.

To determine if a home renovation loan is right for you, ask yourself these four questions:

Question 1: Will the remodeling be worth it?

Have a clear picture of what changes you want to make to your home. Do your research and get a good idea of what it will cost. Will the renovation increase your home’s value? If so, you may recuperate the renovation loan costs when you sell your home. If it will have little impact on your home’s value, then the project – and taking out a loan – may not be worth it.

Question 2: Can you handle another loan payment?

Remember, the renovation loan is not tucked into your monthly mortgage payment. It will become an additional monthly bill on top of your current mortgage payment. Remember that you’ll be paying on the loan long after the project is finished. So, you need to be sure that this is what you want and that you’re prepared to make the payments.

Question 3: How much will you need to borrow?

When determining how much you need to borrow for your home renovation, make sure your factor in labor costs, inspection fees, permits, and architectural or engineering services. The materials used are just the beginning.

Question 4: Can you qualify for a lower interest rate?

Many times, your interest rate is impacted by your credit score and the amount of equity you have in your home. You can calculate your equity by subtracting how much you still owe on your mortgage from your home’s current market value. The higher your credit score and the greater the equity you have often make lower interest rates available to you. Use the Caliber Home Loans Loan Calculator to estimate your down payment amount, interest rate, and payment amounts. This will give you an idea of what to expect before you take out a home renovation loan.

Remember: A home renovation loan is not a home equity loan.

You may be saying to yourself, “this sounds a lot like a home equity loan.” Although your home equity plays an important role in a home renovation loan, home equity loans and home renovation loans are not the same. And the difference is important. First, interest rates for a renovation loan are typically higher than interest rates for a home equity loan. Second, the interest paid on a renovation loan can’t be claimed as a tax deduction.

Two common renovation loans:

Fannie Mae® HomeStyle® renovation loan The HomeStyle renovation loan offers loan amounts up to 75% of the home plus renovation costs. This loan can be used for improvements on your current home or for repairs on a home you are purchasing. Requirements:

  • A credit score of at least 720
  • A certified contractor must prepare a cost estimate
  • Funds must go into an escrow account rather than directly to you

FHA 203(k) loan

It’s easy to see the appeal of the 203(k) loan. You can qualify with a lower credit score, plus it offers a lower minimum down payment and lower interest rate. Like the HomeStyle renovation loan, the funds go into an escrow account. Requirements:

  • Property must meet the government energy efficiency and structural standards
  • Borrower must use a qualified 203(k) loan consultant
  • Borrower must adhere to certain limitations on reselling the home

Other options

Ask me, your Caliber Loan Consultant about special federal programs for home renovations on Title I loans and on energy efficient mortgages. These may work for you. You can also opt for a cash-out refinance loan on your home and use the cash payout to fund your renovation work.

At Caliber Home Loans, we bring years of experience dealing with every kind of home renovation financing in the market. We know how to navigate all the government programs, plus we have an expansive portfolio of loan options to meet your needs. We apply all that knowledge with one goal: To help you attain the home of your dreams in a way that truly works for your unique situation.

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Contact our office with any questions, concerns or ideas.  No Question is too small. 

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