Is using your kitchen table as an office-slash-kids'-classroom making you long to upgrade your home? You’re not alone.
Sixty-one percent of American homeowners have taken on home improvement projects since March 1, 2020, according to NerdWallet’s 2020 Home Improvement Report. But before you can join them, you’ll have to decide how to finance your project.
Refinancing with a renovation loan is a way to borrow money for home improvements at a lower interest rate than personal loans or credit cards. And instead of paying back a separate loan, the costs of your updates are rolled into your new mortgage payment.
Intrigued? Here are three reasons to consider refinancing with a renovation loan.
Reason 1: You can take advantage of low interest rates
With mortgage rates falling throughout 2020, the number of mortgage refinances has skyrocketed.
Americans took out over 2.3 million refinance loans in the second quarter of 2020, according to mortgage industry analytics company Black Knight. Even with all that refinance activity, Black Knight estimates that almost 18 million homeowners could still benefit from refinancing.
With a renovation refinance, improvement costs become part of your new mortgage amount. Because rates are at or near record lows, this could mean borrowing more without drastically changing your monthly mortgage payment. While it may not compare to a credit card with a 0% introductory APR, a renovation refinance gives you a higher borrowing limit. And you'll pay much less interest than you would on a personal loan for the same amount of money.
Reason 2: Remodeling is an accessible alternative to buying
Though the spring homebuying season got off to a slow start due to the coronavirus pandemic, real estate markets throughout the country have since heated up. According to the National Association of Realtors, 69% of homes sold in August were on the market for less than a month and the inventory of unsold homes was down almost 19% when compared with a year prior.
"Multiple offers and bidding wars have just led some people to stay where they are and customize the home to their liking," comments Jamie Zeitz, a Jacksonville, Florida-based sales manager with Homebridge, which offers renovation loans.
More than 1 in 5 (21%) of those who have tackled home improvement projects since March opted to do so instead of looking to move, according to NerdWallet's 2020 Home Improvement Report.
Though concerns about the spread of COVID-19 initially caused contractors' workloads to drop, "by the end of the second quarter, people had found workarounds," says Paul Emrath, vice president of surveys and housing policy research at the National Association of Home Builders.
And they seem to be working. The NAHB’s Market Index for the third quarter of 2020 found that remodeling professionals were quite confident about the current market and the outlook for the rest of the year.
Reason 3: You may add value to your home
A smart renovation can boost your property's value — and it isn't all about curb appeal or gourmet kitchens, either.
A 2019 joint report from the NAR and the National Association of the Remodeling Industry found that replacing outdated heating and cooling systems or upgrading insulation offered some of the best returns on investment when it came time to sell, for example. In the meantime, such updates could result in a more comfortable home and lower utility bills.
And, unlike a cash-out refinance, a renovation loan may expand your budget by allowing you to borrow against the home's expected value after improvements are complete, rather than its current value. Similarly, you may be able to take advantage of a renovation refinance even if you haven't owned your home long, since these loans require less equity than a cash-out refinance, home equity line of credit or home equity loan.
Tips for using a renovation refinance
Think a renovation refinance might be for you? Here's what's next:
Research the right loan product: Renovation loan options include Freddie Mac's CHOICERenovation loan, Fannie Mae's Home Style renovation loan and FHA 203(k) refinance loans from the Federal Housing Administration.
Your credit score and the improvements you plan to tackle determine which renovation loan is right for you, Zeitz says.
FHA 203(k) loans typically have more lenient credit requirements, but place limits on the types of renovations you can do. If you wanted to, for example, put in a pool, you'd need to qualify for a conventional renovation refinance like the Fannie Mae Home Style.
Get familiar with refinance requirements: In addition to available home equity, your lender will examine your credit score, debt-to-income ratio and employment history to determine if you qualify for the renovation refinance loan you're seeking. If you're considering a 203(k), bear in mind that even though the FHA's credit score minimums are typically low, lenders can impose their own higher numbers.
Find an experienced contractor: In order to know how much you'll need to borrow — or how much your home may be worth once the remodeling's done — you'll need accurate cost estimates from a licensed contractor. It's also important to have a contractor who's willing to take on the extra paperwork and planning involved with a renovation loan.
Compare lenders: Though rates are low, comparing interest rate quotes from at least three lenders will ensure you get the best deal. Your research may be a bit tougher since not all lenders offer renovation loans. Even lenders that offer FHA loans may not necessarily offer FHA 203(k) loans. But once you find the right fit and get approved, you'll be on track to create the home you need from the house you already have.