Homeownership entails much more than just buying and owning a home. One of the main jobs for a homeowner is to maintain the property and if they want to keep or increase the value, they will need to do the necessary upgrades and improvements.
Some people are lucky enough to have the cash on hand for improvements and or repairs, but the facts are most homeowners do not budget or have the money for many of these expenses that come along with fixing up their home.
One of the easiest and most cost-effective ways to get the needed funds is to get what is called a home improvement loan, aka home renovation or remodeling mortgage loan. Home improvement loans are specifically designed to help homeowners make improvements or repairs to their property for the purpose of enhancing its market value.
A home improvement loan is very similar to the mortgage loan in which the collateral used is the home and the loan will have to be repaid for a certain length of time. They can either be one new mortgage or a second mortgage. Many lenders consider this type of loan as a good investment because the value of the collateral usually appreciates in time.
These types of mortgages are secured by the equity that has been built up in your property so you will need to refinance. Because the home is used as the security for the loan, the lender will need to do an appraisal to see if you have sufficient equity to get cash out. If you are approved and get a new mortgage, your home will have a new lien on it, which will remain in force until such time that the loan has been completely repaid.
One of the first steps in obtaining a new loan is to make an inventory of the repair or improvement requirements for your home. You will need to get professional bids from licensed contractors that will be required to determine the approximate costs to complete the construction and repairs.
It is a good idea to also study how much the value of your home will increase after you have completed the various works to make sure that you do not lose money on the project. You can do this by searching for comparable homes that have sold new you that have been upgraded and or remodeled on property search engines like Zillow or Trulia.
After carefully calculating the cash you’ll need and determining if it is really worth it, you can now do some research on potential lenders and the rates and terms that they offer.
Here at Prime Lending, we offer several home improvement and home remodel loan options.
These are conventional loans that can be used for primary residences, second homes, and investment properties. The loan can be used for structural repairs or cosmetic improvements, but they must be attached to the property and increase its value. New appliances such as an air conditioner and stove etc. can be added into the loan.
The Department of Housing and Urban Development (HUD), offers home improvement programs that operate through FHA-approved lending institutions. The Section 203(k) program is the HUD’s primary program for the rehabilitation and repair of single-family properties.
With this program, the homeowner can obtain one mortgage at a fixed or adjustable rate to finance the purchase of the home and also the improvements to the home. The proposed loan amount would be based on future value after the repairs are made.
FHA 203K Streamline [203K(s)]
These loans only allow repairs to be cosmetic in nature and a maximum loan amount of $35,000. Since these mortgages are smaller, they are easier to obtain which is why it’s called “streamline.” These loans can also be used to refinance existing home loan and rehab properties.
FHA 203K Full
These loans are for primary residences only and to purchase or refinance a home that’s in need of major repairs and/or renovations. The repairs can be structural and/or cosmetic in nature. An important benefit is you can buy a home and complete the repairs using just this loan. It has a fixed rate with only a 3.5% down payment.
These are jumbo loans to cover non-structural repairs up to $250,000 for homes valued over $424,100. They can be used for purchasing a home or refinancing. Fewer costs by rolling repair and purchase/refinancing expenses into a single loan.
Please note that some home improvements are tax-deductible, such as improvements made for medical reasons to accommodate a chronically ill or disabled person, which are typically 100% tax deductible. Repairs and improvements made for aesthetic purposes or to increase the value of your home are not tax-deductible.
If you have any question about the loans listed above or if you would like a free rate quote, please feel free to call me, Erik Sandstrom with Prime Lending at 619-379-8999 or email me at Erik.Sandstrom@PrimeLending.com.