As the COVID pandemic drags on, more people are staying put in their home and choosing to renovate rather than upgrade to a bigger or updated home. Paying for renovations to your existing home, especially for homeowners without substantial equity in their home, is a challenge.
The traditional method to finance renovations is to use a home equity line of credit. However, this requires a substantial amount of equity in your home to qualify for a loan. For example, if you owe $300,000 on a $400,000 home, traditional lenders will typically loan up to 80% of the equity of the home, meaning the amount you could borrow would only be $20,000. It is difficult to do major renovations such as add a room for $20,000.
Renovation Financing solution
One company has come up with a solution to this dilemma. RenoFI, founded in 2019, works with traditional lenders such as credit unions to offer financing based on the projected appraised value of your home once your renovations are complete. They will typically provide up to 90% of your future appraised value. So using our $400K home as an example, if your home is expected to appraise for $500K when done, you can borrow an additional $150K (90% of $500K = $450K, minus your existing first mortgage of $300K = $150K additional loan value.)
RenoFI loans allows homeowners to expand their home while still early in their original mortgage, without expensive options such as construction loans.
Other home renovation loan options
RenoFi’s loans are one of several options for homeowners looking to renovate. Among the others:
- Home equity lines of credit. Home Equity Loans (HELOC’S) come with one significant caveat: To borrow against your house, you must have plenty of home equity. Before considering a HELOC, make sure the value of your home is significantly higher than the amount you still owe on your mortgage. HELOCs usually close quickly and carry variable interest rates.
- Home equity loans. Essentially a second mortgage, a home equity loan comes with a fixed interest rate. As with a HELOC, you’ll need sufficient equity.
- FHA 203(k) loans. This type of loan lets you borrow against the value of the home after improvements. FHA loans are lenient about down payments and credit scores, but they charge higher mortgage insurance fees than other types of loans.
- Cash-out refinance. In this scenario, you borrow more than you owe on your existing mortgage and apply the proceeds to renovations. This requires equity in your home.
- Construction loan. A home construction loan is a short-term, higher-interest loan that provides the cash to pay the contractors. The property owner typically needs a longer-term mortgage after the work is completed.