How to finance your home renovation goals this summer

Summertime is the best time for renovations

Summer’s here, and it’s the perfect time to give your home that much-needed makeover. If you’re a homeowner dreaming of upgrades, renovation home financing, a cash-out refinance, or a Home Equity Line of Credit (HELOC) could help you achieve your renovation goals!

How much can you borrow? That depends on several factors:

Your home’s equity

Equity is calculated by deducting the amount you owe on your home from its fair market value. If your home is appraised at $450,000 and you still owe $200,000, you have $250,000 in equity.

Your finances

A cash-out refinance works like any other loan, which means we will examine your credit score, finances, income, and debt levels. These factors will determine the loan amount and interest rate.

Your LTV

In addition to interest rate, a key component of a cash-out refinance is the loan-to-value (LTV) limit set by the home loan program you choose. Most programs limit you to borrowing no more than 80% of the home’s value, although Veterans Administration (VA) loans allow up to 100%

What is renovation home financing?

So, let’s say you decide on a renovation loan to upgrade, remodel, or repair your home. The Fannie Mae HomeStyle Renovation mortgage opens up a world of possibilities for homeowners, offering a simple way to make renovations and repairs to a house that might be less than perfect but perfect for them! With this mortgage, you can obtain funds in addition to the cost of the mortgage with standard pricing, allowing you to tackle many renovation projects and address repair contingencies.

Fannie Mae HomeStyle Renovation mortgages are designed to purchase or refinance a home. HomeStyle loans allow borrowers to take the completed value of the project when determining the total loan amount, up to 75% of either the purchase price plus renovation costs or the “as completed” appraised value, whichever is lower. With standard pricing and conventional execution, loan funds can be delivered before the project starts.

Top 5 reasons to consider a Fannie Mae HomeStyle renovation mortgage:

1. Cost-effective way to renovate or repair a home at the time of purchase or later.
2. Funds to renovate are provided by one mortgage rather than a second mortgage, home equity line of credit, or other more costly financing methods.
3. The Loan to Value (LTV) is calculated by considering the proposed project, giving borrowers more flexibility.
4. Loan funds can be delivered before the project starts.
5. Use for any renovation project, including updating a bathroom, adding a mudroom, landscaping, or even replacing a roof.

How do I use a cash-out refinance for renovations?

You can refinance your current mortgage with a cash payout for renovations. Determine your home’s equity, which is the difference between its value and the remaining mortgage balance. Estimate the cost of your desired renovations. If approved, your new mortgage will pay off the existing one, and you’ll receive the cash difference. Your monthly payments will now include the refinanced amount.  And then, you are free to do as you want with the money.

How do I use a Home Equity Line of Credit to renovate my home?

When using a home equity line of credit (HELOC) for home renovations, follow these steps:

Assess your equity by determining the current market value of your home and subtracting the outstanding mortgage balance to calculate your home equity. Apply as you would any other loan by providing the necessary documentation (income, credit score, etc.). Once approved, you’ll receive a line of credit based on your home equity. You can withdraw the funds as needed with a HELOC to cover renovation costs, pay contractors, purchase materials, and complete the renovations.

HELOCs typically have a draw period (usually 5-10 years) during which you can borrow. After the draw period, you’ll enter the repayment phase. Remember, Interest rates on HELOCs are variable.  Be mindful to use the HELOC for renovations only and avoid overspending or using it for non-renovation purposes.

Summer will be over before you know it, so if you are thinking of tackling a renovation project, you should start the loan application process now so you will learn how much you qualify for and what projects you can realistically afford. Time and money are the most significant factors in the home renovation process. Whether you choose a renovation loan, a cash-out refinance, or a Home Equity Line of Credit (HELOC) to make your renovation dreams come true, our experienced loan officers can help.