A fixer-upper home can be a dream opportunity — imagine finding an underpriced gem in a great neighborhood that just needs a little tender loving care to grow into its potential.
But that TLC comes at a cost. Remodeling a bathroom or kitchen can cost thousands, or even tens of thousands, of dollars.
How does a homeowner finance these kinds of improvements? Luckily, you have options, whether you own the home or have the financial ability to purchase the home.
If you own the home
Cash-out refinance
Mortgage interest rates remain low, making it a good time to refinance. With a cash-out refinance, you can tap your home equity for extra cash and add it to the loan amount as a way to finance your home improvements. With rates as low as they are, the effect on your monthly mortgage payment could be minimal. (If it’s been a long time since you last financed your home, your payments could even decrease).
Home equity loans and lines of credit
A home equity loan enables a homeowner to use a house’s equity as collateral for a loan. A home equity line of credit (HELOC) works in a similar way but allows homeowners to draw down on the loan as they need it, rather than taking it out in one lump sum. For both of these types of loans, the interest you pay on them may be tax-deductible, a nice bonus. Banks such as Heartland Bank provide a range of loan options for homeowners and potential homeowners.
If you’re purchasing a home
Construction home improvement loan
Some of the best real estate deals you’ll find are homes that require construction, since many home seekers are looking for a home that’s move-in ready. If you don’t mind dealing with a construction project and have the financial means, you may be able to take advantage of a construction loan, which allows a homeowner to receive funds from the lender as needed while making improvements to the home.
As a purchasing homeowner, you would need to put together detailed plans for the renovation in order to obtain this financing. This typically includes bids, estimates and architectural drawings. It will also likely require an “as completed” appraisal, or a determination of how much the home will be worth when all the improvement work is completed. This allows the lender to obtain a value of the property before the actual improvements have been made.
When you visit lenders such as Heartland Bank, construction home improvement loans usually take the form of interest-only loans, and some down payment may be required.
Keep in mind that your lender will approve invoices as they come through and do periodic inspections of your progress. These types of loans are considered temporary financing during the home improvement phase. Once construction is complete, your lender will help take your loan to permanent financing.
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