What is better a Renovation Loan or Cash Out Refinance?

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Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
Loan Safe Mortgage
Jan 14, 2011
San Diego, California
When looking to upgrade your home (or purchase a home that needs renovation) there are a few things to think about when determining the direction you take and how to pursue it. There are different benefits for each option and depending on what you are looking to do will determine the direction to take.

Let's take a look at a few things to consider.

Cash Out Refinance Benefits:
  • No one controls the money that you receive to make the upgrades outside of you, this can be beneficial with contractors.
  • Quick transaction, contractor approval not required
  • Much less stressful of a loan process (in most cases)
  • If you have a significant amount of equity this may be the direction to take

Cash Out Refinance Downfalls:
  • If you're short on equity you may not be able to pull out enough cash.
  • Interest rates are typically higher than a renovation home loan
  • You are the only one watching over your money to ensure it's handled properly

Now that we've discussed a few of the benefits and downfalls of a cash out refinance, let's take a look at renovation home loan and you can ultimately decide what is best for you.

Renovation Home Loan Benefits:
  • The amount you can borrow is based on the "Subject To" completion value of the home, meaning what it's worth after the repairs are complete.
  • Interest rates are typically lower as you're not directly receiving cash.
  • You have people controlling the funds to ensure the work is being done properly

Renovation Home Loan Downfalls:
  • Transactions will take longer than a cash out refinance due to contractor & bid approval (there are ways to make this faster, see below)
  • You do not have the control of your own money
  • Contractors must be approved (if not on our approved list already), they cannot be felons and must carry an insurance policy equal or greater to the amount of work being complete among other requirements. I'm going to say that this is the biggest challenge as contractors are great with their hands but in some cases not with paperwork. You want to make sure they are familiar with the requirements to obtain contractor approval and are willing to do the paperwork necessary.

When I mention the last bullet point on the renovation downfalls, many clients tend to sway the direction of the cash out refinance. It's not necessarily because they don't want to have to deal with the contractor approval but it may be because they are doing some of the work themselves. You cannot do any of the work yourself when involved in a renovation home.

As I mentioned above, there are quicker ways to get these loans done than having to deal with contractor approval. We have given Lowe's, HomeDepot & Sears full approval and they receive the funds for the projects in full, they do not have to wait for any draws. This is because the contractors that are hired by these companies have already been vetted through a process similar to ours. If you're looking to do basic work or a simple remodel they do a great job.

If you have any questions that I haven't addressed above or would like to find out more information on the different directions to take to improve your home please e-mail me at: [email protected] or call us here at 800-779-4547
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