how do home renovation loans work?

How Do Home Renovation Loans Work?

Gary St. John Home Improvement Projects

Estimated reading time: 6 minutes

A home renovation loan is an excellent option if you own a house that’s getting worse for wear or you want to spruce part of your home up with a new look and some reinforcement. With these kinds of small to mid-sized loans (relative to home value), you can speed up your remodeling project without waiting for your savings to accommodate the expenses involved. Home renovation loans also benefit from being typically smaller than home buying loans and being easier to obtain. Let’s get started.

What are Home Renovation Loans?

The first thing you need to keep in mind when it comes to home renovation loans is that they’re a specific financial instrument. For example, many people consider a home improvement loan the same as a renovation loan, but this isn’t necessarily the case.

Most home improvement loans are little more than unsecured and differently named personal credit loans from a bank or credit card, which come with their own (usually higher) interest rates and payment terms. These might work for home renovation projects, but financially, they’re unsuitable for many reasons that revolve around their repayment terms, repayment limits, limited amounts, and steeper interest rates.

how do home renovation loans work?

On the other hand, home renovation loans are specifically designed to be based on the future value of your home because of the renovation you pay for with them. In other words, your renovation loan is collateralized by the post-renovation value your home is expected to have after you’ve improved it.

For this reason, home renovation loan agreements usually come with much lower interest rates and generous repayment terms. They are usually calculated to be large enough for your expenses. Home renovation loans also often come with specific rules and conditions for the types of repairs they’re supposed to cover, be they structural or cosmetic, and these can be part of your loan agreement contract.

Home renovation loans can be included as extra stipends for fixer-upper projects as part of a general home-buying mortgage. In these cases, your repayment terms and interest rate will be part of your overall mortgage, making the renovation loan much less painless as its separate debt.

Home Renovation Loan Types

Unsurprisingly, there are several types of home renovation loans available today. You can thus shop around for the best options depending on the nature of your renovation project. Some popular renovation loan structures include the following:

Fannie Mae Homestyle loans

These are single-close loans that include renovation lending as part of an overall loan amount. They can be used for appraiser-requested repairs, your design changes on the home, or cover structural remodeling. These loans are popular because they come as part of an overall mortgage and thus require you to only deal with one single loan repayment with one monthly cost and one interest rate. They can be part of 15 or 30-year mortgages and often include adjustable rate options for interest payment. If your credit rating is excellent, these loans are a superb renovation option available from the day you buy your house.

FHA 203(K) renovation loans

Like Fannie Mae Homestyle loans, these are backed by the government but come with different, more restricted terms because they’re made available if your credit rating isn’t excellent. This means that FHA 203(K) loans are more expensive than their Fannie Mae counterparts because of their higher interest rate and because they also often include an upfront fee added to the principal of the loan amount. FHA 203(K) comes in Full Loan versions for significant repairs and high renovation costs, and they also come in the form of a “Streamline Loan” for smaller projects with costs below $35,000.

USDA Rural Development Home Repair Loans

Unsurprisingly, the US Department of Agriculture also has its home renovation loan program. This is run through the USDA’s Rural Development program and helps homebuyers create safe, well-built housing for themselves. These loans can cover smaller renovation costs such as new appliances, foundation reinforcements, siding projects, roofing repairs, or plumbing and electrical renovations. Eligibility for these loans is based on income and location, which should ideally be classified as rural.

how do home renovation loans work?

These are just some of the home renovation loan options out there. Others also exist that are privately funded and structured, which you can arrange through your banking institution or another loan provider. It’s a good idea to shop around for your best possible loan choice.

Home renovation loans can vary widely, with some as small as $5000, while more severe loans can reach $250,000 or more. However, their average range is usually between $20,000 and $50,000.

Why Get a Home Renovation Loan?

Your house or home is probably one of the essential pieces of personal and investment property you own, so it is vital to take good care of it. A home renovation loan can let you do this much more quickly than might be the case if you depend on your finances.

You might want to conserve your home’s livability and quality for a possible future resale. Sometimes, being able to do this means hurrying up renovations on structural issues that will only get worse and more costly if you let them wait. A home renovation loan can save you from these future complications on your most valuable asset.

how do home renovation loans work?

Secondly, you might want to secure a renovation loan quickly so that you can remodel or renovate your home before selling it in a particularly hot real estate market. A loan might be a good idea if you’re sure that you can sell at a solid price that lets you earn a profit while fully being able to repay both your renovation loan and mortgage. In other words, the renovation loan becomes a sound investment in near-future profits in this context.

Going into deeper debt is always a decision that should be carefully considered, but there are many contexts where it’s a necessary thing or a sound financial choice. Home renovation loans let you make this decision with less risk of steep repayment terms than is the case with many other types of non-mortgage loan options. Simply put: paying for urgent home repairs through a traditional renovation loan is a better idea than covering them through your credit card.

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We know your home deserves to be the best version of itself for you and your family. We do everything from adding completely new rooms like dining areas, offices, and additions, to full-service kitchen and bath remodeling, to giving you an entirely new landscape design and outdoor kitchen and living area, or even building that high-end media room you’ve always wanted. 

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