Renovating your home usually means increasing its value, making the long-term return on the investment worth the trouble and initial expense. When you don't have the cash to perform the renovations you want, there are several borrowing options that allow you to access the money immediately and pay it back over time. These options have similar requirements to getting a basic mortgage on your home, so pull all your financial documentation together and work on credit issues before applying for renovation funds.
Refinance your existing mortgage with a higher principal. When you've lived in your house long enough to build up equity, the current interest rates might be lower than what you're paying on your mortgage. Refinancing your mortgage increases the overall amount you owe because you pay off your existing balance and get cash back for your renovation project. It often extends the term of the loan as well, although the new loan doesn't have to be for 30 years -- you can choose a 15- or 10-year option instead. Rolling the renovation funds in with your regular mortgage means just one payment, making it easier to keep up with, but you have to pay closing costs.
Apply for a home equity loan. This is basically a second mortgage on your house. It doesn't affect your existing mortgage; instead, it adds a second monthly payment to cover a loan for the amount of the renovation. The interest rate might be a bit higher than refinancing your existing mortgage, but you're likely to pay less in closing costs.
Open a home equity line of credit. These usually don't incur closing costs, but the rate is variable based on the prime rate. On the positive side, a line of credit allows you to borrow just the amount you need when you need it instead of borrowing a lump sum that might be more than the final cost of the renovation. The downside, however, is that repayment terms often are short -- eight to 10 years -- and the variable interest rate can lead to high payments if the rates increase.
Opt for an Federal Housing Administration (FHA) 203k loan when you buy your fixer-upper instead of getting a conventional loan. These loans estimate the value of the home after renovation, increasing the loan-to-value ratio and allowing you to include the cost of renovation in your initial mortgage. Restrictions exist such as a limit of $35,000 for minor renovations or the need to hire an engineer or architect to provide drawings and stipulations for larger projects. These loans let you take advantage of all the benefits of an FHA loan including a lower down payment and a bit more leeway with less-than-perfect credit.
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