Financing Options for Home Renovations

We are frequently asked about available financing for remodeling projects. For the benefit of our clients, we have prepared the following list of financing options. Be sure to consult with your local banker or mortgage broker for help identifying the best option for you.

Home Equity Loans & Lines of Credit

Both of these financing options use your home as collateral and enable you to utilize the equity you have built up in your home to finance your renovation. If you qualify, lenders will typically provide a loan or line of credit equal to a percentage of your home’s appraised value, minus the outstanding mortgage balance.

Cash-Out Refinancing

For a cash-out loan to be viable, you must have greater equity in your home than the amount owed on your mortgage. For instance, if you owe $100,000 on a home valued at $300,000, then you would have $200,000 in equity. With a cash-out refinancing, you might take a loan for the full amount of the equity and use it to pay off the original mortgage amount and use the extra $100,000 to finance a remodeling project. This can be a particularly good option when current interest rates are lower than your mortgage interest rate.

Construction Loans

Construction loans are issued specifically for the improvements you have planned. In this case, a lender will provide funds for your renovation based on an appraised value of the improvements. Typically, the lender will require that you pay interest only on the loan until the construction is completed and then the loan will be converted to a typical mortgage. It should be noted that these loans are difficult to come by these days, given the challenging economic environment.

Home Equity Conversion Mortgage (HECM)/Reverse Mortgage

The Home Equity Conversion Mortgage (HECM) is the FHA’s reverse mortgage program. A reverse mortgage enables homeowners, who are 62 years of age or older, to withdraw some of the equity in their home and convert it to cash.  To be eligible, homeowners must have a low or no mortgage balance and must live in the home. This is an ideal program for a senior needing to finance an improvement project so they can remain in their home.

As a safeguard, homeowner’s are required by the FHA to receive consumer information from a HECM counselor prior to obtaining the loan. For more information visit HUDs website or call the National Council on Aging at (800) 510-0301. Learn more about the FHA’s Reverse Mortgage Program

 Energy Efficient Mortgage Program (EEMP)

The FHA’s Energy Efficient Mortgage Program (EEMP)  enables homeowners to refinance their mortgage to cover the cost of adding energy efficient features to their home.  Homeowners who meet the income requirements for the FHA’s 203(b) loan are eligible to apply. In order for home improvements to be eligible for financing, a home energy rating report must be prepared by an energy consultant using the Home Energy Rating System (HERS).  Visit HUDS website to see if your home improvement project qualifies for the Energy Efficient Mortgage Program (EEMP). Learn more about the FHA’s Reverse Mortgage Program

203(k) loan

The 203(k) loan allows homeowners to purchase or refinance a fixer-upper property and roll the cost of repairing or improving the property into the loan. To be eligible, the property must be a one to four family dwelling that has been completed for at least one year. The homeowner must be deemed credit-worthy by a FHA-approved 203(k) lender and the property must pass a feasibility analysis. Certain energy conservation and safety standards such as weather-stripping and smoke detectors are required improvements. Visit HUDs website to see if you qualify for a 203(k) loan. Learn more about 203(k) loans

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