Renovating An Existing Home
Homes are expensive to maintain as well as to purchase. Necessary repairs and updates that a home will require over its lifespan can cost you substantial sums of money. For example, a new roof can cost $8,000 or more, while a new foundation can cost over $40,000. A mere kitchen remodeling project can cost as much as you want to pay and can easily cost $75,000 or more in more expensive areas of the country. Often homeowners don't have enough cash on hand to finance such repairs and upgrades. Luckily, there are ways to access the equity built up against the home's mortgage to help out in paying for repairs.
Financing Renovations with 203(k) Loans
The Federal Housing Administration (FHA) sponsors a program that allows home-buyers and existing homeowners to renovate their property. The FHA does not offer funding directly, but it works in conjunction with mortgage lenders to offer special funding for home rehabilitation and repair. The 203(k) program enables a person to purchase and rehabilitate a home with a mortgage alone. Typically, rehabilitation would have to be funded with a construction loan, which is a highly-restricted, short-term loan. Only after rehabilitation was complete would a mortgage be issued. In contrast, the 203(k) allows the homeowner to purchase and rehabilitate the property in one step. The amount of the mortgage would be determined by the projected value of the property after renovation. Rehabilitating a property under this program is much easier than using a construction loan, especially considering that most people lack the experience necessary to complete a construction project in a timely manner as required by the nature of a construction loan. A homeowner could also use this type of loan to renovate property that he or she already owned.
Home Equity Loans / Second Mortgages
The term "home equity" refers to the difference between what the home is worth if sold and the amount of money owed on a home. As long as this figure is positive (e.g., as long as the house is worth more than you own on the mortgage) it is called equity. When the figure is negative it is called negative equity. A home equity loan allows a homeowner to borrow against (positive) equity. Homeowners may use equity loans to eliminate or restructure their debt or to finance home remodeling and repairs. Interest rates on home equity loans are reasonable because the home itself is used to secure the loan and therefore banks are taking less risk in making the loan. Additionally, the interest on a home equity loan is tax-deductible provided the money is used for home improvements. Home equity loans can be very beneficial for homeowners as long as they are used carefully. A good use of a home equity loan would be to refinance debt at a better rate than would otherwise be possible. A home equity loan should not be used to create new debt! Taking out a home equity loan to buy a boat or expensive car is not advisable. It is also not advisable to get an equity loan so large that you would owe money if you were to sell the home. Many lenders will allow you to borrow up 125% of the home's value. Doing so creates negative equity. Some lenders will also charge a prepayment penalty. That means that you will be charged a fee if you pay off the loan sooner they the lenders expects. These types of loans encourage homeowners to stay in debt longer and should generally be avoided.