According to a survey by Trulia, 90 percent of homeowners have renovation plans for their homes. More recently, the number of home renovations has been on the rise, with many of us spending a lot more time at home. Whether it’s a kitchen remodel you’ve always wanted, or an extension to your home for a home office, deciding how to pay for your plans is one of the key considerations before starting a home renovation. Some may choose to finance their renovation plans using their savings. Others may opt for consumer financings like credit cards or home improvement loans. In a Groundworks Companies survey, 20 percent of homeowners said they planned on spending their tax refunds on home improvements this year. Before you make your decision on how to pay for your home renovations, here’s what you need to think about when considering each option.
Do You Qualify For An FHA HomeStyle Renovation Loan?
If you’re thinking of taking out a second mortgage to pay for your renovations, the HomeStyle or FHA 203 loan could be a more economical choice. Backed by the government, the HomeStyle Loan is based on your home’s future value after the improvements are done. So if you are adding a new kitchen, the lender will take into account the 5 to 15 percent value that it would add to your home. You can also finance up to 97.5 percent of your home using the FHA 203 loan – so if you don’t have a lot of equity built up in your home yet, it may be a good choice.
However, to qualify for a HomeStyle loan, you will need to meet certain criteria. You need at least 5 percent equity in your home, and your lender will need to approve your contractor’s qualifications. Borrowers also need to have a credit score of at least 620 to apply, and a DTI ratio of less than 45 percent. You are also required to pay for mortgage insurance, so add the cost of that into your renovation budget. Alternatively, you can opt to use either conventional or online mortgage institutions for a home loan. Keep in mind that conventional lenders can come with lots of additional fees and a longer application process.
Would Your Mortgage Terms Be Better If You Refinanced?
Another option for paying for your renovations is to refinance your home. This can be appealing, since it comes with much lower interest rates than using your credit card, and it can simplify the process by rolling your loan and new mortgage payments into one. Mortgage rates have dropped below 3 percent recently, so it may be a great time to capitalize on lower interest rates. However, your credit score and other personal indicators will play a large part in the rates you’re offered. If your monthly mortgage repayments work out at more than what you’re currently paying, you may have trouble affording it with your current budget.
Would You Have Enough Left In Your Emergency Fund If You Used Savings?
While using savings for your home renovations is one of the best options, it can also leave you depleted and vulnerable financially. Having an emergency fund is even more important as a homeowner, since unexpected expenses like emergency repairs are known to pop up. However, if you end up using your emergency savings to finance your renovation plans, you will be placing yourself in a precarious situation as a homeowner.
Therefore, if you do choose to use your savings, ensure your emergency fund still contains between 3 and 6 months of your monthly expenses. Also, it helps to budget for up to 15 percent extra on your home renovation costs. When budgeting for your renovations using your savings, it’s better to overestimate than underestimate and be left short in the middle of a remodel.
Renovating your home comes with many decisions, including how to finance it. Taking the time to consider all your options can make a huge difference to your renovation process – and how much you end up paying.