Financing a home renovation in 2022 can give you the extra cash you need to update your home, build equity, and finally get that backyard kitchen you’ve been dreaming about.
If you’re like a lot of homeowners, 2022 is looking a lot like 2021 at the moment. This means remote work, kids home from school and using your home as the main hub for everything you do in life.
Financing your home renovation doesn’t have to break the bank either. You can do a cash-out refinance, apply for a new renovation loan, access your equity through a home equity line of credit and more.
Whether you want to build out your current home or buy a fixer-upper, these mortgage options will help you finance the whole renovation top to bottom.
How to Use Your Home Equity for a Home Renovation
Home equity is the financial difference between your mortgage balance and the appraised value of your home. For example, if your current mortgage balance is $475k and the current market value of your home is $720k, then you’ve got $245k in home equity.
The most popular ways to access your home equity for a home renovation are:
- Cash-out Refinance
- Home Equity Loan
- Home Equity Line of Credit
When you want to access the equity in your home, most lenders will only approve up to 80% of your home’s value. This allows for market fluctuations in property value and lowers risk in the eyes of the lender. In the example above, the 80% Loan-to-Value ratio means you could borrow up to $576k, giving you potential access to $100k.
Cash-Out Refinancing for a Home Renovation
Refinancing your mortgage with a cash-out refinance gives you the most flexibility. You can choose whether to refinance with a fixed-rate, adjustable-rate, 15-year, 30-year, or custom options.
Once your new mortgage closes, you’ll receive your cash (equity) in a lump sum, and you can spend it however you want. There are no limitations, no requirements, and no accountability. You can also take your time using the funds or even use the funds on things outside your home renovation.
Home Equity Loan
Home equity loans are almost always fixed-rate loans with set terms, fixed monthly payments, and a fixed payment schedule. You get the full amount in one lump sum once you’re approved. Then you pay off the loan in fixed payments over the life of the loan.
- A low-interest rate that is locked in for the life of the loan
- Fixed monthly payments which make it easy to budget and plan
- Lump-sum disbursement so you can start a big project right away
- No limitation on the use of funds
- The interest on your home equity loan may be tax-deductible
Worth noting: higher credit scores mean lower rates. Check for prepayment penalties in case you decide to pay it off sooner than scheduled or if you might want to refinance later.
Home Equity Line of Credit (HELOC)
Home equity line of credit operates like a revolving credit account. Instead of having a set payment schedule and a fixed rate, HELOCs give you access to a line of credit with a maximum limit.
You can use the funds at any time, and you won’t accrue any interest until you draw from the account. HELOC’s have a set draw period (typically 10 years) and a variable APR based on the prime rate and market trends.
- Access as much or as little money as you want to meet the needs of your projects
- Interest doesn’t accrue until you access the funds
- Repayment terms are flexible (pay it off or make minimum monthly payments)
- Use the funds for whatever you want
- The interest on your HELOC may be tax-deductible
Fannie Mae HomeStyle Renovation Home Loan
The Fannie Mae HomeStyle Renovation Home Loan is a great opportunity for current homeowners who want to do some big updates, as well as homebuyers looking for a fixer-upper.
The HomeStyle renovation loan has a lot more flexibility than the FHA 203(k). For example, you could put in permanent landscaping features such as a pool or an outdoor kitchen, build an accessory dwelling unit (ADU), or upgrade your windows. Consider full kitchen and bathroom upgrades for the interior or build an extensive remodel.
The HomeStyle renovation loan estimates the cost of repairs and renovation ahead of time, so you have one mortgage that includes the entire amount (renovation costs + purchase price). Once your approved mortgage closes, you’ll be able to start improvements right away and enjoy the financial security that comes with one mortgage payment.
The Fannie Mae Home Renovation loan is extremely flexible with a full suite of advantages which we blogged about here.
The FHA 203(k) Home Loan
With the FHA 203k loan, you can buy a home that needs a fair amount of work and make the repairs affordable with one mortgage and a single monthly payment . The 203k combines the price of the home with all renovation costs and finances everything with one mortgage at a fixed rate.
Since the home loan covers the purchase price plus all the renovations, you’re able to spread the cost of repairs over the life of the loan with one affordable mortgage payment.
There are a few restrictions with the FHA 203(k) loan along with great benefits, which we blogged about here.
VA Renovation Home Loan
The VA home renovation loan is a unique program offered to active members of the military, veterans, and their spouses. The VA renovation loan is government-backed (guaranteed by the government). For this reason, mortgage lenders can offer low mortgage rates and great terms.
Like other home renovation loans, the VA renovation home loan puts the costs of repairs, upgrades, labor costs, and materials into one loan. This means one mortgage payment and financial stability while the repairs are completed.
One caveat: borrowers need to use a VA-approved contractor for the work in order for the loan to get approved.
If you’re ready to start your home renovation in 2022, connect with a mortgage advisor to discuss your goals. There are several custom loan options in addition to home equity loans and cash-out refinancing. Whether you are a homeowner with equity or looking to buy a fixer-upper, starting a home renovation in 2022 is a smart move. Connect with a local mortgage advisor to discuss your loan options and get busy. We’d love to help.