Owning a fixer-upper can be one of the most rewarding experiences. Having the opportunity to remodel a house into the image of your perfect home, especially through your own hard labour, is one not many people pass up. But the process itself can be very expensive.
So how do you go about managing to pay for everything that goes into making a home functional? There are plenty of options available that not many people know about. So if you’re interested in remodeling a home from the ground up or trying to renovate a home you already have, here are some great options to help you afford everything that you need.
Paying with Cash or a Credit Card
These should be the options you go to first, but don’t rely on them too much. They should be used on affordable projects, not large and expensive ones. One project, for example, would be painting. A few buckets of paint and some brushes are pretty inexpensive and the labour would most likely be carried out by you. And yet, once the job’s all done, your home will look a lot better afterward. A lot of reward for not a lot of money. It really all depends on what kind of project you’re trying to get done. If you’re looking to spend more than a thousand dollars, however, then you’re better off looking at other financial options.
With this option, you’ll be able to refinance your home and receive cash at closing. Of course, this option will only work if you have any equity in your home. However, this option is stuck at a fixed rate for a fixed term, so there is no flexibility. However, because of the long life span, you can have more cash to devote to other things such as paying off other high-interest debts.
But this option isn’t without its drawbacks, and one of them is paying the closing costs. They’re not going to be the same for everyone and will include factors such as the lender, the cost of the loan, and whether you’re paying points at closing, just to name a few.
Getting a Second Mortgage
People hear the word “second mortgage” and instantly shy away from this option. However, there is a type of second mortgage called HELOC or “home equity line of credit.” It is a revolving loan on your home that functions similarly to a credit card, where you can spend any amount up to the line of credit and then pay it off over the life of the loan.
Another option is a home equity loan, which also functions the same way. The only difference is that it is a fixed-rate loan for a fixed term. Which means you have a deadline to pay it off. In either case, if you fail to pay off the loan, the bank can exercise the option to foreclose your home just like with a regular mortgage.
So when is getting a second mortgage a good option? For those who have built up equity in their homes and are able to pay off the costs of renovations within a few years, then a HELOC would work best. If you’re lucky, you may even be able to have the mortgage interest you pay deducted off your income for your federal tax return.
These are loans that are made specifically for those renovating a house from the ground up. Renovation loans don’t look at the current cost of the house but are dependent on the appraised value in the future when everything is complete. That makes it more likely that you’ll get more money than you would with other loans. If you want a rundown of what is involved, then you can learn more here.
This seems like a great option, but refinancing loans aren’t without their cons. Because of the high payout of this kind of loan, it means that you’re going to have higher interest rates and higher closing costs, which you may not be able to account for if you don’t plan ahead. So when is a renovation loan a good option? It’s a great choice for those who are making major or expensive renovations that would completely overturn the value of the property.
It’s important to note that there are two main kinds of renovation loans that are available: Homestyle and FHA 203(k). There are major differences between the two, so knowing what they are will help you to arrive at a more well-informed decision.
The Homestyle option is a conventional loan where there are strict credit requirements that must be met before a loan is even considered. A down payment is also required to prove that you’re capable of making payments. The upside to this kind of loan is that it is the more affordable option, but the downside is that you can only use up to 50% of your home’s future value for renovations being made.
The FHA 203(k), provided by the Federal Housing Administration, is a loan with lower credit requirements, but insurance premiums that must be paid upfront. Within this loan, there are two further options to choose from. The first is a limited 203(k) that will cover up to $30,000 in renovation costs that do not include health and safety or structural renovations. The second is a full 203(k) that covers other kinds of renovation work. If you’d like to learn more, you can check out the FHA website here.
Being able to complete the renovations on your home can wear anyone’s patience thin and you shouldn’t let it do the same to your wallet. Plan ahead financially as to how you’re going to complete and pay for your renovations without going broke. Weighing the pros and cons of the suggestions mentioned can provide you with the best option, and if you’re still stuck, consider talking to a financial expert to help you make the most financially sound decision for you and your needs.