Refinance for Home Improvements – Home Improvement Loan
If you are looking to refinance for home improvements, then you will likely be searching for a home improvement loan or sometimes called a home renovation loan or a cash out refinance loan. Lenders offer various mortgage programs to get this accomplished, but their guidelines and criteria will differ.
The most common home improvements made after getting a home improvement loan are new kitchens and baths, windows and siding, and even a new pool. In some instances, homeowners will add on a new room such as a master suite. These improvements and modifications often are costly and require special types of financing.
Types of home improvement loans
These are the most popular loan programs for homeowners to utilize when refinancing for home improvements. Each one of these programs are very different from one another and will likely have different requirements and interest rates.
Cash Out Refinance for Home Improvements
A cash out refinance is when you refinance your current mortgage balance for a higher amount and use the additional cash for other purposes. There are a multitude of reasons for a cash out refinance other than to make home improvements. The most common reason is actually for debt consolidation.
Benefits of a cash out refinance
- Finance your primary mortgage and borrow the funds needed for home improvements all on one loan
- Many lenders offer cash out refinance options
- Interest rates are reasonable
- You can use the funds for any purpose
Disadvantages of a cash out refinance
- Lenders will cap the loan to value ratio which could limit the amount you can borrow
- You are re-starting your mortgage again with a fresh 30 years
- Cash out amount limited by your credit score
- You may end up with a higher rate than what you have now
Cash out refinances are the most popular and widely available option for people who are looking to refinance for home improvements. Read this article about cash out refinances for more information.
Home Equity Line of Credit for Home Improvements
A home equity line of credit or home equity loan is also often used for home improvements. With this type of loan, you keep your original mortgage in-tact. The home equity line of credit provides you with an approval for a credit line that you can draw against at your discretion. You only pay interest on the funds you have drawn and not on the total approved loan amount.
Advantages of a home equity line of credit for home improvements
- You only pay interest on the amount that you draw
- Your original mortgage can remain in place especially if you have a low rate
- It can remain open for as long as you own your home
- Funds can be used for any purpose
Disadvantages of a home equity line of credit for home improvements
- The interest rate is adjustable and could increase significantly over time
- Making just minimum payments could increase your loan balance
- Your home can be foreclosed upon if you miss payments on a HELOC
If you are self-employed and cannot qualify using your tax returns, then this option is not available to you
If your first mortgage has a low rate, then a home equity line of credit may be the best option for you. Contact us to discuss your options and scenario.
FHA 203k Loan For Home Improvements
An FHA 203k loan is one that traditionally is used at the time of purchase when you are buying a fixer upper. You are able to borrow the money needed (with 3.5% down) to purchase the home AND also borrow the funds for remodeling and repairs all in one loan. This is the only option that allows you to purchase more than the value of the home for home improvements.
Although FHA 203k loans are traditionally used at the time when the home is being purchased, they can also be used when refinancing even after you already own the home.
Advantages of an FHA 203k loan for home improvements
- One loan to finance the home plus all of the improvements
- You can borrow more than the value of the home on a purchase
- Loan to value ratio up to 110% of the improved value
- Interest rates are low
Disadvantages of an FHA 203k loan for home improvements
- Funds can only be used for home improvements
- Some improvements such as pools are not permitted
- All plans must be pre-approved before the loan closes
- An FHA consultant must be used to oversee the project
- Not all lenders offer this program
The FHA 203k rehab refinance loan is really a great option for home improvements if you are able to get it all done
Home Improvement Loan Rates
The rates to refinance your home for home improvements will vary depending upon the loan program and the lender. Two of the most significant factors impacting your rate are the loan to value ratio and your credit score. It cannot be emphasized enough how important it is to have good credit. If you are struggling with your credit, then read this article on how to improve your credit score.
Setting up a home improvement project can take some time so ask your lender whether you can lock in your interest rate well in advance and whether there are any fees for an extended rate lock.
Home Improvement Loan Q&A
How much cash can I take out for home improvements?
The amount of cash you can take out for home improvements is directly tied to how much equity you have in your home. There will be a maximum loan amount for each type of mortgage. The loan product that will allow you to cash out the most is the FHA 203k refinance loan.
Does the lender have to approve the home improvements?
Lenders will not have to approve the repairs or remodeling plan before closing your loan. In most instances, you can do whatever you want with the funds. However, the FHA 203k refinance is different and everything must be approved, even your contractor.
Should I cash out money from my 401k for home improvements?
There are some 401k programs which allow you to pull out the funds to make home improvements. However, you should read the rules of your 401k plan closely and then consult with a financial advisor and a tax accountant. It is possible that you could pay a hefty tax penalty which is why you must seek professional advice before going this route.
Can I get a home improvement loan for a condo?
Home improvement loans can absolutely be used for the remodeling of a condo. There are some rules and limitations when it comes to changes you can make in a condo. Some condo associations have rules regarding changes to the units and you may need to get approvals from the condo association.
Can I get a home improvement loan for a mobile home?
Finding a lender that will provide home improvement financing for a mobile home may be difficult. Not many lenders want to provide any type of mortgage for mobile homes. However, the few that do may require the home to be on a permanent foundation and for it to be at least double wide.