Home Improvement Loans for Remodels & Renovations

From overflowing Pinterest boards filled with inspiration to home loan applications leaving you speechless, we’ve all been there. You know you want to transform your home, maybe add a spa-like bathroom, or finally finish the basement, but figuring out how to finance a home renovation without breaking the bank can feel like a complicated puzzle. Fortunately, at Design First Builders, we have worked with countless clients who have used a variety of loans to help them affordably achieve their dream homes. We’ll look at the most popular types of home improvement loans and construction loans so you can head to your lender of choice prepared.

Types of Home Improvement Loans

The good news (and we have a lot of good options for you) is that there is a variety of loans that are created to fit different needs and budgets. There’s no one-size-fits-all in home improvement loans. Regardless of the type of home improvement loan, it is always a good idea to shop around for rates and terms. From banks to credit unions, specific details can vary greatly, which can impact the overall cost of the project, both in the short and long term.

Home Equity Loan for Remodels

If you have equity in your home (the market value of your home minus what you owe on your mortgage), you can apply for a home equity loan. This type of loan typically has a fixed interest rate and a set repayment period.

Say your current kitchen is stuck in a 1970s avocado green time warp. A home equity loan can tap into the equity you’ve built in your home, allowing you to borrow a fixed amount of money to completely update it.

Crunch the Numbers

Your home is valued at $300,000, and you owe $200,000 on your mortgage. This means you have $100,000 in equity. Most lenders allow you to borrow up to 80% of your equity. In this example, you may qualify for a home equity loan of around $80,000. With potentially lower interest rates compared to unsecured loans, this could save you even more money.

Home Equity Line of Credit (HELOC)

A HELOC is similar to a home equity loan, but it operates more like a credit card with a revolving credit line. You can borrow against it as needed, and you only pay interest on the amount you’ve borrowed.

Looking to add a trendy water closet, stunning tile, or a light-filled doorless shower? Whatever your dream bathroom looks like, a HEOLOC may be the loan to get you there.

Crunch the Numbers

If your home has $150,000 in equity and your lender allows you a maximum HELOC limit of 80%, that would translate to $120,000 for your bathroom remodel. Remember, a HELOC is not given in one lump sum like a home equity loan. It’s important to know that it is a variable interest rate, which means it can fluctuate and increase your monthly payment.

Refinancing Your Mortgage

Financing home renovations can be done by refinancing your mortgage. Refinancing involves taking out a new mortgage to replace your existing one. You can use the extra cash from the refinance to fund your remodel. Keep in mind that this will increase your mortgage amount and might extend the time it takes to pay off your home. It is crucial to talk with a mortgage broker and discuss the current interest rate. If you have a very low-interest rate, refinancing your mortgage might not make sense.

Future Value Loan (Home Construction Loan)

A future value loan is used to finance construction projects but differ from a construction loan. Disbursement of funds is more flexible but requirements can be very strict because of the projected future value.

A future value loan is like financing the anticipated value of the completed house. A traditional construction loan is financing the cost of materials and labor. A future value loan is a distinct financing product with several unique characteristics from other loans. Your lending advisor can walk you through the finer details. We’ll explain more on construction loans for use in a remodel or renovation project below.

What is a Construction Loan?

This type of renovation loan has short-term financing solutions and is designed to cover the costs of building a home. They operate differently than HELOC and home equity loans, and terms are around 12-18 months, which generally aligns with a construction timeline.

Key Factors of a Construction Loan

Draw Process

Construction loans often have a “draw” process. Instead of receiving the entire loan amount upfront, borrowers receive funds in stages, known as “draws,” as the construction progresses. This helps ensure that the funds are used for the intended construction purposes.

Interest-Only Payments

During the construction phase, borrowers usually make interest-only payments on the amount drawn. This is because the full loan amount hasn’t been disbursed, and the principal isn’t due until the construction is complete.

Conversion to Permanent Mortgage

Once construction is finished, the construction loan may be converted into a permanent mortgage or paid off using the proceeds from a new mortgage. This transition is known as the “construction-to-permanent” loan process.

Future Value Considerations

The lender considers the future value of the property once construction is complete. The lender may assess the potential market value of the property as part of their risk evaluation and determine the borrower’s eligibility for the loan.

Risk Mitigation

Lenders may use various methods to mitigate the risks associated with construction loans, such as requiring a detailed construction plan, assessing the borrower’s creditworthiness, and ensuring that the construction is overseen by qualified professionals.

To drill down deeper into specifics, use the Construction Loan Calculator to determine what you may expect with monthly payments and calculate the conversion and monthly interest payments.

I Selected a Financing Plan, What’s Next?

Congratulations on choosing a home improvement loan that works for you. The next steps will have you working directly with your financial institution. When you have signed all the paperwork, you’ll receive your funds. Ideally, you should be in contact with Design First Builders early in your home remodel timeline. We’ll discuss your project, scope, complexity and other factors, all of which will aid in realistic estimates and costs of your project. Bringing us in early can set you up for a smoother, more informed remodel journey. Contact Design First Builders to start your remodel or home improvement project for 2024!