Image by Rudy and Peter Skitterians from Pixabay
If you are one of the thousands of homeowners planning home renovations this year, chances are that finances are on your mind. In past research by Wakefield Research, 77 percent of respondents planned on renovating their homes with an average of $11, 473 being spent on them. Fast forward to 2021 and over half of Americans are planning to remodel their homes as everyone spends more time indoors. Whether it is designing your home to suit your new remote working arrangements, updating your fixer-upper to match your dreams, or making sustainable renovations to help reduce household bills this year, renovations can cost a pretty penny. The good news is that there are now many ways homeowners can pay for their renovations plans. Depending on the overall and your preference, here are a few ways you may be able to finance your home renovation this year.
Secure A Home Renovation Loan
Home renovation loans like the FHA 203 (k) Home Improvement Loan and Fannie Mae Homestyle Renovation Mortgage come with federal backing, making them a lot more affordable. With either option, you can combine your renovation and home purchase costs into one payment. Both options also require a minimum credit score of 620. However, each option also has differing criteria.
With the Fannie Mae Renovation Mortgage, homeowners need to have at least 10 percent of their appraised renovation costs available in cash- in case of emergencies. For the FHA 203 (k) Home Improvement Loan, your renovation costs need to be at least $5,000. You are also required to submit your renovation plans with your application and have them drawn up by an approved contractor.
Think About Using A Cash-Out Refinancing Mortgage
Homeowners can also use cash-out refinancing to pay for their renovations. Also known as cash back refinance, this financing method allows you to replace your existing mortgage with a new one which rolls the cost of your renovations and your existing balance on your old mortgage. The difference between your new and old mortgage can then be drawn out in cash to pay for your renovations. On the bright side, the current low mortgage interest rates can bode well for your refinancing deal and allow you to get a larger mortgage with lower interest rates. However, you can still expect to pay more since closing costs need to be paid again, and you will be increasing your mortgage amount in the long run.
Taking A Loan From Your 401K
If you are looking for another loan option, you can also borrow from your retirement funds. Taking a renovation loan from your 401k comes with a few caveats, however. Homeowners seeking a renovation loan from their 401k can only borrow up to $50,000 or 50 percent of their 401k’s value. Therefore, if your renovations will cost more than $50,000 you will need to think about additional funding sources.
Also, like other loan options, a 401k loan comes with interest charges- normally a little higher than the prime rate. For June 2021, the prime rate was 5.5 percent so you can expect an interest rate between 6.5 and 7.5 percent. Homeowners also need to factor in additional fees like origination and maintenance fees. Any loans borrowed also need to be paid back within 5 years. If you fail to do this, you are liable for an income tax charge by the IRS and an early withdrawal fee of 10 percent.
There are many ways to pay for a home renovation. The more important question is: which route is best for you? By doing some research beforehand and weighing your options, you can ensure you get your dream home with the right funding deal to go with it.