So, we have heard through the grapevine that you are planning a home remodeling project.
How do you plan to finance it?
A concern that we knew you would have, which is why we are here to address it.
One of the most critical steps in this project is payment. If it’s a major remodel, you will have to set aside an initial amount to pay the contractor in advance and consider the hardware that will have to be bought in advance. The rest will be paid as the project goes on, including labor costs.
It was tough to borrow money from a bank for even a minor kitchen remodel until recently. We won’t recommend using a credit card or personal loan because they have a high APR. There are plenty of other options you can look into, some of which we are about to share.
Home Equity Line of Credit (HELOC)
This loan option comes with a low-interest rate and allows you to use your house as collateral. You can borrow a set amount against your house and repay it over 20 years. If you manage to pay back the entire loan, you can borrow repeatedly.
If you miss a payment, the lender will take possession of your property to cover his loss. Whether approaching an independent lender or a bank for HELOC, you will be charged 5% of the loan’s amount as closing costs.
FHA Title 1 Loan
A Title 1 loan is offered to qualified buyers, such as those wanting to upgrade their house for comfort and savings. Home renovation under this loan includes:
- Buying appliances.
- Improving the home’s energy efficiency.
- Making the property more accessible.
Single-family homes can borrow around $25,000 with repayment terms from 6 months to 20 years. Loans above $7,500 use the home as collateral. Your loan application will be rejected if you haven’t lived in the house for 90 days.
Home Equity Loan
A home equity loan allows you to borrow money based on how much equity you have built in your house. You can use it to borrow money and pay it back in 5 to 30 years. This loan is often called a second mortgage because you borrow against your house.
A home equity loan has a high-interest rate and requires you to pay 5% of the loan’s amount as closing costs.
This loan option taps into your equity. Most people refinance their homes to get a new mortgage, which they use to cover the old one. Here’s an example to help you understand this.
Your home is worth $250,000. You currently owe $50,000 on the existing mortgage. You take out a new mortgage of $100,000. Half of it is used to pay the old mortgage, and the other half is used for renovations.
So, which option are you going to choose? In our opinion, a HELOC offers you the most benefits with a low-interest rate and the opportunity to borrow multiple times.
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