Monthly Myth: All Home Renovations Have to Be Paid Out of Pocket


Renovations can be expensive. The total price, of course, depends on the type of project you need completed and the area where you live, but it’s not uncommon for many projects to cost tens of thousands of dollars.

According to Remodeling Magazine, which conducts an annual survey of remodeling costs, the average price for a wood deck in 2021 was over $16,000. A midrange bathroom remodel costs an average of $24,424, while a midrange minor kitchen remodel costs, on average, over $26,000. (Just for fun, an upscale master suite addition, according to the magazine, costs about $320,000!)

Completing these projects could improve your property value and enhance your enjoyment of the home. However, many owners avoid these loans because of an unfortunate and inaccurate myth.

 

Myth: All Home Renovations Have to Be Paid Out of Pocket

One of the most common myths in the real estate and homeownership industry is that you have to pay for renovations and home improvements out of your own pocket. This myth is not only applied to people who own their homes, but also to people who are purchasing their homes.

Most mortgages, we admit, are for purchasing a home, not for making upgrades to the property. But not all.

This myth is likely tied to the concept of “LTV” ratio.

LTV stands for “loan to value.” The “loan” in “LTV” is the total amount being given by the bank or lending institution, while the “value” means the value of the property. If the home is valued at $400,000 and you get a $400,000 loan, your “LTV” is exactly 100%. But if you get a loan for $300,000, your LTV is 75%. ($300,000 is 75% of $400,000.)

Most traditional mortgages offer financing well below 100%. Usually for a typical loan, you’ll need a 5% downpayment or more, which means the LTV would be 95% or less. This has likely given rise to the assumption that you can only get financing for the purchase, not the renovation. Because if you’re getting financing for the renovation in addition to the purchase, your LTV would be 100% or higher.

So the myth has formed and persisted, leaving people to believe that if you want to complete renovations on your home, you’ll need to pay for it out of pocket.

 

Truth: There are Numerous Options for Financing Your Renovation Project

Whether you are purchasing a home or you already own your property, you don’t have to pay for it out of pocket. There are numerous options for funding your purchase, including loans for both the purchase of a property and renovations.

 

Renovation-Loan Options if You Own the Home

If you own your home, there are options that allow you to pay for renovations. These are especially beneficial if you have built equity into your property.

 

Home Equity Loan

A home equity loan is essentially a second mortgage on your property. (In fact, they are often called “second mortgages.”) The loan is secured by your current property, which reduces risk to the lender and allows them to offer more generous terms, including lower interest rates.

To get a home equity loan, you will likely need around 20% equity in your property. So if you have been living in the house and making regular payments for quite a few years, this loan is likely an available option.

 

HELOC

Another financing option is a HELOC, which stands for “Home Equity Line Of Credit.” A HELOC also uses your equity to support the loan, but instead of getting a lump-sum loan, you are approved for a line of credit worth a certain amount.

Instead of taking a check and making regular payments to pay off the loan, you can withdraw from the line of credit and only make payments on what you take out. These loans are useful if you have multiple small projects and aren’t exactly sure how much financing you’ll need.

 

Cash-out Refinance

If you need to complete projects on your home, but also want to get a better interest rate, you might consider a cash-out refinance. With this loan option, you’ll pay off the original loan and get a new mortgage with (hopefully) a lower rate or better terms as well as cash that can be used for construction and remodeling.

Let’s say you have a house valued at $700,000, on which you currently owe $400,000. You could refinance to a new loan of $600,000. $400,000 of that new loan could be used to pay off the existing mortgage, while the remaining $200,000 could be used for renovations.

 

Renovation-Loan Options if You are Buying

There are also home-renovation options for purchasing a home and making upgrades.

 

Fannie Mae HomeStyle Renovation Loans

Fannie Mae offers the HomeStyle program, which allows you to get a loan for more than the purchase price, using the difference to pay for repairs and improvements. You may have to bring a downpayment, but this depends on your income and the loan type. There are also credit requirements, and there is a specific time table for completing the renovations.

 

Freddie Mac CHOICERenovation Loans

Similar to HomeStyle, this option allows you to make a purchase and pay for renovations. This is one of the best options when you want to rehabilitate or improve a home but don’t have the available cash. The loan amounts are based on the expected value after completion, as well as other factors.

 

FHA 203(k) Loans

The FHA supports a single mortgage loan that pays for a purchase and renovation. Borrowers have to follow FHA guidelines, and the type of renovations you can complete may be limited. Generally this means essential improvements only, such as roof repairs and window replacements.

 

Get the Loan You Need for All Your Home Renovations

No matter what your current home situation, we are here to help. Whether you need a fixer-upper or to make a purchase and renovate a property, or you simply want to refinance your mortgage and upgrade your current property, we are here to make it happen!

 

Contact our staff today and find out how we can help with your home renovations, repairs, and upgrades!