A home renovation can do everything from updating the look of your home, increase the usable space in your home or even increase the value of your home. That being said, home renovations can be costly, running anywhere from a few thousand dollars to tens of thousands of dollars depending on how extensive the renovations will be. Here are three ways to finance your home remodel.
Home Equity Loan
If you owe less on your home than your home is worth, then you have equity in your home and can borrow against it. For instance, if your home is worth $350,000 and you only owe $250,000 on it, then you have $100,000 in equity. Lenders will generally only loan up to 80% of the amount of equity you have, so you should be able to borrow up to $80,000 if you have $100,000 in equity. A home equity loan is essentially a second mortgage, however, so it will also come with most of the same closing costs and fees that you had to pay on your first mortgage.
Home Equity Line of Credit (HELOC)
A home equity line of credit works similarly to a home equity loan in regards to the amount you can borrow but it works more like a credit card than a loan. With a home equity loan, you receive one bulk amount and then repay it in fixed monthly installments. With a home equity line of credit, however, you can use only what you need as you need it.
FHA 203(k) Mortgage
While interest rates on home equity loans tend to be lower than those of credit cards, they tend to be higher than first mortgages. If you already have a low interest rate on your original mortgage, then you will probably not want to roll your first mortgage into the cost of a second mortgage. FHA 203(k) mortgage, however, will combine the costs of your original mortgage with the cost of a second mortgage. Since this is a federally backed loan, you may actually see a decrease in your interest rate. With an FHA 203(k) mortgage, your home is also valued post-improvement rather than pre-improvement, which generally increases the amount you can borrow.