Do you need to renovate your home but are unsure how to pay for it? If you’ve lived in your home awhile, you probably have renovations you need to do – but renovation can be costly.
However, if you put off necessary renovations, you could end up spending more in the long run. A small problem now can turn into a major problem later – which costs more to fix. Additionally, a small problem currently could lead to other issues that are more expensive to repair – like a leaky roof causing water damage throughout your home.
Not repairing your home can also hurt your home value. Buyers like to see that everything is working well, so having an unresolved maintenance issue can deter buyers from purchasing your home.
Because of the long-term issues and cost, you should fix the problems in your home as soon as possible. Though the question still remains – how do you pay for your renovations?
Home renovation loans are one way to finance your renovation. Whether home equity or personal loans, you can borrow money from traditional lenders to pay for your renovation.
Don’t know how to get a renovation loan? No need to worry – we’ve got you covered. Below are 6 easy steps to get a home renovation loan to finance your renovation with less stress.
Step 1: Determine How Much You Need
Before you can get a loan for your home improvement project, you need to know how much it’s going to cost. That way, you don’t borrow more than you need – or not enough to cover the project.
A good starting place to figure out the cost of your project is looking at the average cost of the project you want to do. Below are the average costs for common projects:
- Kitchen: $20,474
- Asphalt Roof: $20,000
- Siding: $14,000
- 10 Vinyl Windows: $8,500
- 10 Wood Windows: $20,000
These averages are a rough estimate you can use to ballpark the cost of your renovation. To get a more accurate estimate of the cost of your project, you need to know the scope of your renovation.
For example, if you’re renovating your kitchen, do you want to do a gut job or do small updates?
By considering how involved your renovation is, you can adjust the average numbers to get a more accurate cost estimate. The more you want to do in a renovation – like replacing everything in your kitchen – the more your renovation will cost.
Therefore, if you have a large renovation project, you should adjust the average upwards. If you have a small remodel, you can adjust the average downwards.
Looking at averages and adjusting based on what you want to do in your renovation will give you a rough cost estimate. However, if you want a more accurate estimate, you should contact contractors in your area for free quotes on how much they would charge for your project.
Knowing the cost of your renovation is the first step to getting a home renovation loan to finance your project.
Step 2: Figure Out the Right Loan Term
Once you know how much your renovation will cost, you should consider how long you need to pay off the loan.
Having a longer loan term (20-30 years) means you’ll have lower monthly payments to pay off your loan. However, you’ll also be paying off your loan for a longer time period. This could result in you paying more during the lifetime of your loan because there’s more time for interest to accumulate.
With a shorter loan term (2-5 years), you’ll pay off your loan faster – and with less overall interest. However, your monthly payments on your loan will be much higher with a shorter loan term.
If you have a large project or can’t make high monthly payments, a long loan term would be best. If you have a small project or can make high monthly payments, you should consider a short loan term.
To get a home renovation loan, you need to know what loan term is right for you.
3. Consider Your Eligibility
Before choosing a loan type, you need to think about your eligibility for loans.
A traditional eligibility measure for loans is your credit score and history. To qualify for a loan, you need a credit score of at least 580. However, many loans require a minimum credit score of 680.
Another measure for eligibility is your debt to income ratio. This is how much debt and gross income you have monthly – expressed in a percentage value.
For example, if you have $5,000 in income per month and $2,500 a month in debt (mortgage, car payments, credit card payments, and more), then you’d have a 50% debt to income ratio. Most lenders cap your debt to income ratio around 45%. However, some lenders will loan to people with a 50% debt to income ratio.
Lenders also determine your eligibility for some loans based on how much home equity you have. Your equity is the value of your property minus any loans you owe on it – like your mortgage.
As you pay down your mortgage or your home value increases, your equity goes up. The more equity you have in your home, the better chance you have of getting a loan that uses your house as collateral.
Before you choose a type of loan, you should know your eligibility measures – like credit score, debt to income ratio, and equity in your home.
4. Choose Your Loan Option
The next step is choosing a loan option. There are 4 main types of renovation loans:
- home equity loans
- home equity lines of credit
- government loans
- personal loans
Home Equity Loan
A home equity loan allows you to borrow against the equity you have in your home. These loans are a type of second mortgage because you’re taking out another loan on your home.
With a home equity loan, you borrow from the equity in your home. Therefore, if your home is worth $200,000 and you’ve paid off $100,000 of your mortgage, you have $100,000 of equity to borrow against.
However, you likely won’t be able to borrow for the full amount of your equity. Lenders cap the amount you can borrow at 85-90% of your home value.
Thus, you’d be able to borrow $170,000 total on your home. When you account for your mortgage balance ($100,000), that leaves $70,000 available to borrow with a home equity loan.
Home equity loans have a fixed interest rate that’s lower than credit cards but higher than your first mortgage. These loans normally require a credit score of at least 680.
Moreover, this loan uses your home as collateral. If you default on the loan, your lender can foreclose on your home.
You have up to 30 years to repay a home equity loan. However, the balance remaining on home equity loans is also due when you sell your home – cutting into your potential profit.
If you have a lot of equity in your home, home equity loans could be a good choice for financing your renovation.
Pros
- Lump sum at closing
- Fixed/ possibly tax-deductible interest rate
- Predictable monthly payments
Cons:
- Risk of foreclosure if you default
- Costly monthly payments
- Needs good credit
Home Equity Line of Credit
Home equity lines of credit (HELOCs) are another option for using your equity to finance your renovation. Much like home equity loans, you can borrow up to 85% of the value of your home – minus your remaining 1st mortgage.
HELOCs differ from home equity loans because they give you an available pool of money to use as you need it. Similar to credit cards, HELOCs have a maximum amount of money you can withdraw. However, you don’t have to use it all.
There are 2 periods during the lifetime of HELOCs – the draw period and the repayment period.
During the draw period (usually 10 years), you can withdraw money up to the limit set when you open a HELOC. In this time, you only need to pay the interest on the money you use. Paying the principal balance is optional.
During the repayment period (usually 15-20 years), you can’t use any more of the HELOC money. Your monthly payments are based on the amount of money you used – plus interest. HELOCs don’t have fixed interest rates, so how much interest you repay depends on current rates.
HELOCs use your home as collateral. Thus, you risk foreclosure if you can’t pay. Additionally, to qualify, you need a credit score of at least 680. Lenders can also freeze your line of credit if they don’t think you’ll be able to repay what you’ve spent.
HELOCs offer flexibility if you have home equity and good credit.
Pros:
- Flexible amount
- Can withdraw multiple times
- Potentially tax-deductible interest
Cons:
- Variable interest rate with strict credit requirements
- Risk foreclosure if you default
- Added monthly expense
Government Loans
You can also finance your renovation through government loans. They’re easier to qualify for because the government insures them. This makes you less of a risk to lenders if you have a low credit score or higher debt to income ratio.
One of the most popular government loans is a Title I loan insured by the Federal Housing Administration (FHA). With this loan, you can borrow up to $25,000 for your renovation project. However, you can only make improvements to your home that are necessary or improve its function – not luxury improvements (like adding a pool).
Property Assessed Clean Energy Programs (PACE) loans are another option. These loans are only for energy-efficient renovations – like new appliances or solar panels. If you have bad credit, PACE loans are a good option because your credit isn’t a big eligibility factor.
PACE loans are attached to the property – not the original borrower. If you sell your home, your loan will be the next property owner’s responsibility.
This can make selling your home challenging. Many buyers don’t want to assume another loan when buying a new home. If you haven’t paid off your PACE loan when you’re trying to sell, you might struggle to attract buyers.
Your repayment term can be as long as 25 years. You also repay a PACE loan through your property taxes – not a separate loan payment. The downside of repaying it through taxes is that you’ll have a very large tax bill while you’re repaying.
If you struggle to qualify for traditional loans and have a smaller project, government loans can be a good option for your renovation.
Pros:
- Easier qualifications
- Some loans don’t have monthly payments
- Lower interest rate
Cons:
- Low maximum loan amount
- Possible lien on your home
- Only covers specific improvements
Personal Loans
Though not specifically for renovating your home, you can use a personal loan to finance your remodeling project.
Personal loans are usually unsecured – meaning they don’t have collateral like home equity loans or HELOCs.
Because they’re unsecured, personal loans typically depend entirely on your credit score and history. Some lenders will qualify you with a credit score as low as 580 – but you’ll have a significantly higher interest rate. If you have a good credit score, you’ll get a lower interest loan.
Personal loans have shorter loan terms – usually 2-5 years. This means you’ll have a much higher monthly payment than with other options. Personal loans typically have fixed interest rates, so you’ll have predictable monthly payments.
If you don’t have much equity or don’t want to risk your home in your loan, personal loans are an option to finance your home renovation project.
Pros:
- No collateral
- Fixed interest rate
- Accepts low credit scores
Cons:
- Short repayment terms
- High-interest rates (especially for low credit scores)
- High monthly payments
For financing your renovation project, you can choose between 4 types of loans: home equity loans, home equity lines of credit, government loans, and personal loans.
5. Choose Your Lender
After you decide on a loan, you need to choose a lender. While multiple lenders offer the same type of loan, the loan requirements and payback terms could be vastly different.
Before considering a lender, you need to make sure you can qualify for their loan. For each loan, you’ll need a specific credit score, debt to income ratio, and home equity amount (among others) to be considered for the loan.
When looking at lenders, you should also compare their interest rates. The lower interest rate you have, the less you’ll end up paying throughout the lifetime of your loan.
Another important factor to consider when choosing a lender is their customer satisfaction ratings. You’ll be interacting with your lender for 2-30 years. This means you want to make sure your lender is easy to work with. You can see how happy previous customers have been by checking out online reviews on the lender.
Choosing the right lender will not only save you money on your loan. It will also save you the headache of dealing with a difficult lender.
6. Consider Point – A Loan Alternative
While getting a loan used to be one of the only options to finance a renovation without cash, Point offers an alternative to loans.
To finance your home renovation, you can get a Home Equity Investment from Point. Unlike a loan, you won’t have a monthly payment. Instead, you can repay Point’s investment any time in the 30-year term or when you sell your home. This allows you to pay for necessary renovations now without worrying about another monthly expense.
Point also considers a much wider range of homeowners than traditional lenders. Like, those with lower credit scores (as low as 500), or homeowners with higher debt to income ratios. If you’re unable to qualify for a loan due to your financial situation, you still have a good chance to qualify with Point.
With Point, you don’t have to pay traditional interest on the money you receive because the Home Equity Investment is not a loan. Instead, at the end of the agreement, you pay back the lump sum plus a portion of your home’s appreciation. This appreciation amount is determined at the beginning of the process. That way, you know exactly how much you’ll repay Point at the end of the agreement.
If you need to renovate your home but don’t qualify for traditional loans (or don’t want to take on more loan debt), Point provides a great option to finance your renovation.
Wrapping It Up
Renovating your home can be a necessary but costly project. If you neglect needed repairs – like fixing a leaky roof – your home could be further damaged. A roof leak could lead to water damage, which would cost you more in the long term to fix.
Deferred maintenance can also cause your home value to drop. If there are maintenance issues at the time of sale, buyers need to spend more than the purchase price to make your home move-in ready. As such, they’re willing to pay less for your home – decreasing its value.
Despite the necessity of repairs, it can be hard to figure out how to finance them. However, you don’t need to worry. You do have a variety of options to pay for your home renovation project.
One option is a renovation loan, which can be a home equity loan, a home equity line of credit, a government loan, or a personal loan. To get one of these loans, you need to know:
- how much your renovation will cost
- what length of loan term is best for you
- your eligibility
- what type of loan is right for you
Plus, you need to compare lenders to find the best one for you.
An alternative to this process is paying for your renovation with a Home Equity Investment from Point. You don’t have to meet strict eligibility requirements, worry about a monthly payment, or accrue any interest.
You simply get the cash you need when you partner with Point. You can repay Point’s investment (plus a percent of your home’s appreciation) any time in the 30-year term (or when you sell your home). If you want an alternative to traditional loans, see how much you can get with a quick quote from Point.