Jump to:
Renovating a home is not an easy task. It requires both mental and financial prowess. It costs a lot and for owners without enough cash to handle it, there are different kinds of loans they can access.
The best one for you is dependent on the situation and probably your age as some of these loans are only available for seniors. So, which is the best for you?
FHA 203(k) Loan
It is a special government loan for both purchase and renovations of a home. The loan can be used for installing flooring, repairing the roof, improving energy efficiency, enhance the free movement of a disabled person, among others.
This kind of rehab loan is of two major classes:
203(k) limited loan: It’s capped at $35,000 and does not fund a major structural renovation.
203(k) standard loan: Major structural renovation is eligible. The needed amount for repair must be at least $5,000.
Since it is a government-backed loan, the qualification process is not as rigorous as typical loans.
Pros:
- Low income and downpayment. The downpayment can be as low as 3.5%.
- It has a significantly low-interest rate.
- Available for different kinds of homeowners ― not restricted to first time buyer.
- May be eligible for a tax deduction.
Cons:
- It can only be used for a primary residence.
- You will need FHA Mortgage insurance to be considered.
- The process can be longer when compared with other loans.
- Borrowers are prohibited from performing renovation themselves.
Cash-Out Refinance
Cash-out refinance is simply a type of mortgage where you replace an old loan with a new and larger one. The lender in this case would pay you the cash difference between the old loan balance and the refinanced loan. To qualify for a cash-out refinance loan, you will need (to):
- Debt-to-income ratio no higher than 45%.
- At least 20% equity in the home.
- Own the property for at least 6 months.
Pros:
- Can qualify with a credit score as low as 620
- Permitted to use funds for other things aside from renovation such as college fees.
- It may help to lower interest rates and increase loan tenure.
Cons:
- Payment of closing costs is mandatory.
- Risk losing your home if you default.
- Interest rate and tenure may not be favorable.
Friends and Personal Loans
In case you don’t want to risk your home as collateral, friends and personal loans are the best. Loans borrowed from friends are most likely not to come with any interest rate while the repayment plan and tenure could be flexible.
A personal loan is easy to access if you have a good credit score and don’t require proof of equity in your home.
Pros:
- Easy to process.
- Friends loans may come at no rate.
- Money can be used for any other thing.
Cons:
- Loan tenure is usually short.
- A personal loan has a high-interest rate.
- Default on friends’ loans could severe the relationship.
Home Equity Line of Credit (HELC)
A home equity line of credit is similar to a credit card only that in this case, the accessible cash is based on the equity and value of your home.
It can also be a second mortgage such that the amount you are eligible to borrow will be the balance of your total home value minus the amount owed on the primary mortgage. The home value must be at least 15% more than you owe.
Pros:
- Interest-only paid on the withdrawn fund.
- Lesser closing costs (if applicable)
- Lower interest rate compared with typical credit cards.
Cons:
- Money can be spent on what’s not needed.
- The interest rate can rise.
- There may be a minimum withdrawal requirement.
Fannie Mae Home Style Refinance Loan
This HomeStyle refinance loan is backed by Fannie Mae, a quasi-governmental agency.
The loan can be used to purchase, refinance, or renovate a property.
You can get a loan of up to 97% of the total home value and renovation expenses.
Pros:
- Low-interest rate and down payment.
- Allows any kind of renovation, even the purchase of a hot tub.
- Covers permits and license fees.
Cons:
- Renovation is time-bound (must not be beyond 12 months).
- Cannot be used for improvements that are not permanent to structure such as furniture.
- No structural change to the home is allowed.
Reverse Mortgage
The reverse mortgage is a flexible and easy to access loan but only available for seniors. You must be at least 62 years old to qualify.
It is perfect for seniors who need more funds to renovate their homes to adapt to old age.
The loan can also be used for other purposes. According to experts at All Reverse Mortgage, “Funds from a reverse mortgage are not restricted for home renovation. It can also be used by seniors who are short on fund for living expenses.”
Pros:
- Payment is only due when you move out, sell the house, or die.
- Protection against market fluctuation.
- No tax liability.
Cons:
- Limited to seniors (62 years old and above).
- Heirs and spouse could lose the home.
- Need to hire an expert for a seamless experience.
