A renovation loan is a type of financing that allows homeowners to borrow money specifically to make upgrades or repairs to their home. These loans provide funds that can be used for renovations both big and small.
Renovation loans open up possibilities for homeowners. They make it possible to turn that outdated kitchen into a chef’s dream workspace or add the extra bedroom you’ve always wanted. With the right loan, you can give your home a complete facelift or just make a few small changes to increase comfort and enjoyment.
Why Choose a Renovation Loan?
There are several benefits to using a loan designed for home renovations rather than other financing options
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Lower Rates – Renovation loans through programs like FHA 203(k) or Fannie Mae HomeStyle can offer lower interest rates than alternatives like personal loans or credit cards. This saves you money over the life of the loan.
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Pay Over Time – Rather than paying for upgrades in a lump sum, a renovation loan allows you to spread repayment over months or years. This can make projects more affordable.
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One Loan, One Payment – When bundled with a purchase or refinance, renovation loan payments are rolled into your overall mortgage payment for simplicity
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Access Home Equity – Loans like HELOCs allow you to leverage home equity to fund projects while keeping first mortgage intact.
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Loosen Restrictions on Use – Personal loans offer flexibility to use funds on any renovations without strict oversight requirements.
What Types of Home Renovation Loans Are Available?
There are several options for financing home renovations, each with their own pros and cons. Here are some of the most common types of renovation loans:
Mortgage-Based Renovation Loans
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FHA 203(k) Loan – This government-backed mortgage can cover purchase or refinance along with renovations under a single loan. Ideal for significant upgrades.
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Fannie Mae HomeStyle Loan – Similar to 203(k) but may have lower borrowing limits. Offered through conventional lenders.
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VA Renovation Loan – Allows veterans and service members to finance renovations along with a VA home purchase or refinance mortgage.
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Freddie Mac CHOICERenovation – Conventional loan option for bundling renovation costs into refinance.
Home Equity Financing
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Cash-Out Refinance – Refinancing pulls equity out of the home to use on renovations. Results in higher loan balance.
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Home Equity Loan – Second mortgage that lets you borrow against home equity. Adds another monthly payment.
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HELOC – Revolving line of credit secured by home equity. Flexible but interest rates are variable.
Other Financing Options
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Personal Loans – Unsecured loans from banks and online lenders. Higher rates but can be used for any renovation project.
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Credit Cards – Revolving credit lines can be used for renovations but come with high variable interest rates.
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Seller Financing – In some cases sellers may finance renovations for buyers directly through the purchase contract.
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Grants & Rebates – Government and utility programs may provide grants or rebates to make certain energy-efficient upgrades more affordable.
What Are the Steps to Getting a Renovation Loan?
If you’re considering using a home renovation loan for upgrades, follow these steps:
1. Decide on project scope – Make a list of renovations and get contractor estimates to determine your budget.
2. Pick loan type – Choose the right loan product for your specific project and financial situation. Get pre-qualified.
3. Find a lender – For specialized products like 203(k) loans, find an experienced lender familiar with these mortgages.
4. Apply & get approved – Complete loan application providing income, employment, and credit information for underwriting.
5. Close on loan – Finalize loan, submit renovation plans, and funding will be available to start renovations.
6. Make renovations – Use loan proceeds to pay contractors to complete all planned upgrades and repairs.
7. Repay loan – Make monthly payments over loan term until renovation loan balance is repaid.
What Are Some Common Home Renovation Projects?
Renovation loans allow you to fund all sorts of upgrades and repairs. Some of the most popular renovation projects include:
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Kitchen remodels – Appliance upgrades, cabinet replacements, layout changes
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Bathroom remodels – New tubs/showers, vanities, fixtures, flooring
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Exterior updates – Roof replacement, siding, window replacement
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Additions – Bedrooms, bathrooms, garage, porch
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Basement finishing – Creating livable spaces like rec rooms or in-law suites
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Electrical and plumbing repairs – Upgrading wiring, replacing pipes
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HVAC improvements – New furnace/AC, ductwork, smart thermostats
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Energy efficiency upgrades – Insulation, air sealing, new windows/doors
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Flooring – Hardwood, tile, laminate to update worn or outdated flooring
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Interior finishings – Paint, trim, built-ins to refresh aesthetics
What Should You Know Before Getting a Home Renovation Loan?
While renovation loans make projects more affordable, it’s important to consider a few things first:
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Loan fees and closing costs will add to your total borrowing amount. Shop around for best rates.
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Not all renovations may increase home value enough to recoup costs. Cosmetic upgrades typically add less value.
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Using home equity reduces the equity available later for other needs. Proceed with caution.
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Major structural changes often require permits and contractor licensing. Understand regulations.
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Renovation work doesn’t always go according to plan. Pad budgets for contingencies.
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If using a 203(k), renovations must be completed within 6 months. Careful project management is crucial.
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Renting the property may be restricted for a period after using certain renovation loan programs.
The Bottom Line
Renovation loans allow homeowners to finance improvements and upgrades to their home through borrowing leveraging home equity. Options like the FHA 203(k) loan provide low rates and allow you to bundle borrowing into a single mortgage.
While renovations can add value to your home, they also take research, preparation and caution to ensure the benefits outweigh the added debt burden. But with the right loan and project, you can turn your house into your dream home.
Home Equity Loans & Lines of Credit
Access the money you’ve invested in your home while you’re still living in it. Home equity loans and lines of credit are personal loans that use your home as collateral. Often used to finance college tuition, debt consolidation, or new business ventures as well as home improvements, home equity loans let you borrow up to 80% of your home’s market value minus the amount you owe on the mortgage. It can be a smart choice if you have a substantial amount of equity built into your home and want to borrow a large lump sum for bigger renovation projects.
Home Equity Loan Advantages:
- Fast approvals
- Lower rates and closing costs
- Fixed interest rate
- Fully amortizing, so you start repaying interest and principal from the beginning
- No restrictions on how you use the money
- May be tax deductible—ask your tax advisor
Disadvantages:
- Higher rates than cash-out loans
- Smaller loan amounts
- Payments do not go towards your existing mortgage
- Adds another monthly loan payment
Home Equity Line of Credit (HELOC) is a revolving credit line you can draw on as you need it. Typically offering variable rates, HELOCs are similar to credit cards—take out as much as you need at any time, up to your credit limit. Your monthly payments depend on current interest rates and your loan balance. You can pay it down over time or all at once as you see fit. HELOCs are a good option for smaller, less expensive or ongoing projects.
HELOCs have a draw phase, during which you can draw on your credit line as much and as often as you need to while paying off the interest each month. After a set amount of time (typically 10 years), you will enter the repayment phase. You can no longer take money out of your credit line. Instead, you will make monthly payments on the interest and the principal as the loan becomes fully amortized through the remainder of your term.
Home Equity Line of Credit Advantages:
- Borrow what you need, as you need it
- Low monthly payments during the draw phase
- Low to no closing costs
- Great for smaller or ongoing projects
- Pay interest only on the amount borrowed, not the entire credit line
Disadvantages:
- Variable interest rates
- Higher rates than a home equity loan
- Lender can change repayment terms
- Monthly payments can grow substantially when you enter the repayment period
Not all of your renovation loan options use your home as collateral. There are a number of other loans that can help you pay for home improvements.
Personal Loans & Lines of Credit
Unsecured loans that do not require you to put up collateral, personal loans and lines of credit eliminate the risk of losing your house or car should you become unable to repay the loan. Offering speed and simplicity, personal loans can be processed and approved quickly with far less paperwork than refinance or home equity loans require.
Advantages:
- No home equity or collateral needed
- No appraisal required—a great asset if your home is in disrepair
- Access money quickly
Disadvantages:
- Higher interest rates, especially for borrowers with lower credit scores
- Loans limited to $100,000
Personal Lines of Credit are revolving lines of credit allowing you to borrow what you need, as you need it, up to the limit of your credit line. Like the HELOC, a personal line of credit functions much like a credit card, offering great flexibility in when and how much credit you draw on and how you pay it back. Unlike credit cards, credit lines have variable interest rates that can be applied to your existing balance. Be sure you understand how often and how much your lender can raise your rate before signing on to a personal line of credit.
According to a survey by Consumer Reports, 42% of general contractors offer financing options to their clients. Some may offer to help you secure a loan through a trusted third-party lender. Rates and terms can vary widely, so make sure you understand the details, just as you would with any major financial commitment. Before signing, look for online reviews from your contractor-lender’s previous customers and check with your local Better Business Bureau.Section 3
Types of Renovation Loans
Customize your home and find the perfect mortgage loan solution. With over a dozen financing options to choose from, you’re sure to find the right loan to turn your fixer-upper into the home of your dreams.
Insured by the Federal Housing Administration, FHA 203(k) loans are backed by the government, making them a good choice for buyers who need a low down payment or have less-than-stellar credit. Available in Limited and Standard options, they can be used to purchase a one- to four-unit family home, individual or site condominium unit or a mobile or manufactured home.
Advantages:
- 3.5% minimum down payment option
- Lower credit score requirements
- No income limits
- A $5,000 minimum on renovation costs
- Gifts allowed
- Seller contributes of up to 6% of the purchase price
- 15- to 30-year term with fixed interest rate
Disadvantages:
- Requires Mortgage Insurance Premium which can be rolled into the monthly loan payments
- Must be an owner-occupied, primary residence
Allowed Improvements:
- Repair/replace roofs, gutters, and downspouts
- Repair/replace/upgrade existing HVAC systems
- Repair/replace/upgrade plumbing and electrical systems
- Repair/replace flooring
- Minor remodeling, such as kitchens and bathrooms not involving structural repairs
- Painting, interior and exterior
- Weatherization, including storm windows and doors, insulation, weather stripping, etc.
- Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
- Accessibility improvements for persons with disabilities
- Lead-based paint stabilization or abatement of lead-based paint hazards
- Repair/replace/add exterior decks, patios, porches
- Basement finishing and remodeling not involving structural repairs
- Basement waterproofing
- Window and door replacements and exterior wall re-siding
- Septic system and/or well repair or replacement
Limited FHA 203(k) loans cover minor, non-structural repairs and upgrades up to $35,000. There is no minimum cost for renovations.
Standard FHA 203(k) loans require a HUD-approved 203(k) consultant to work with the owner and the contractor to ensure all required renovations are made and payments are disbursed on-schedule, as directed. You will need to select the Standard loan if your home needs major rehabilitation work, structural repairs, landscaping or renovations exceeding $35,000. Renovations must be $5,000 or more. You cannot use the Standard loan to purchase or renovate any luxury item or make improvements that are not a permanent part of the property.
This is THE Best Home Renovation Loan Program – HomeStyle Loan Explained
FAQ
Do renovation loans have higher interest rates?
Are renovation loans hard to get?
Is a construction loan the same as a renovation loan?
What is a home renovation loan?
“Home renovation loan” is a catch-all term referring to a loan that pays for upgrades or repairs to a home. Personal loans are a popular type of home renovation loan, but you can also use a mortgage to cover renovations. These loans can help you buy a fixer upper or rehab your current home. But it’s important to understand the pros and cons.
Should you get a home renovation loan?
Some loans even allow you to finance a home purchase and renovation simultaneously. Whether you’re looking to renovate your kitchen, install a home office or finish your basement, any major home improvement is going to require some major money. A home renovation loan could be your path to getting the project underway sooner than you think.
Is a home improvement loan the same as a renovation loan?
The terms “renovation loan” and “home improvement loan” are sometimes used interchangeably, but they’re not technically the same. Home improvement loans are generally used for more minor upgrades than renovations typically cover, and therefore offer lower loan amounts. Examples of common home improvement loans include:
How do renovation loans work?
Flexible usage: Renovation loans offer flexibility in how the funds can be used. Whether you’re planning to remodel your kitchen, renovate your bathroom, or add an extension to your home, you can use the loan proceeds to cover a wide range of renovation expenses.