Renovation Loans
One of the positive results of the decline of home values in recent years has been that for many the dream of home ownership has become a reality. But some buyers–although they have a good credit score and some savings–have run into the all-too-common problem of the “almost perfect home.” The price is right “as is,” but the needed improvements put it out of their price range. A solution to this problem can be a renovation or 203(k) loan. Typical desired improvements include upgrading the kitchen and/or bathrooms, new flooring, windows, siding, roofing, plumbing, heating and cooling, appliances or painting. In the past these kinds of projects have been funded with credit cards or home equity lines of credit. But these options can be expensive and are not as readily available as they once were. With a renovation loan, the cost of these upgrades can be included in your mortgage, with the interest tax deductible and the additional renovation expense spread out over 30 years.
Suppose you find an otherwise ideal home but a big drawback is the dated kitchen. It needs new cabinets, countertops, flooring and appliances. You estimate the cost to be $30,000. For this $200,000 home, you were going to borrow $190,000 at 5% on a 30 year loan. The monthly payment would be about $1020/month. But if you rolled the $30,000 for renovations and borrowed $220,000 at 5.75%, the monthly payment would be about $1283/month, or $263/month more. On these loans the lender takes into account the increased value of the home due to the proposed renovations. Not a bad way to make the new kitchen possible!
The alternative would be to finance it through a home improvement center, for example, at around 18% for 10 years (about $540/month) or a home equity line, for around 8.5% for 10 years (about $372/month). Obviously there are different views on the best financing for each individual, but the 203(k) renovation route may not be a bad option.
Note for Investors: Renovation loans for needed property improvements are also available to investors considering purchasing rental properties.
At a time when 81% of the homes available for sale are more than 15 years old, it isn’t surprising that home improvements are needed! HUD provides more 203(k) information if you’d like to read more about whether these loans could work for you.