3 Ways To Finance Home Renovations
At some point, every renovation comes down to the same question: how to finance it. Most homeowners rely on one or more of these approaches: using savings, using existing equity with a home equity line of credit, or using future equity with a construction loan. In many cases, it’s a combination of two of them. Because, while winning the lottery would sure make it easier, odds are you’ll need a different way!
#1. Savings
Saving up and paying in cash means covering your renovation with money that’s been set aside for that purpose. It’s the cheapest way to pay for a renovation, though it does take time to build up the funds.
Waiting could mean delaying needed updates, leading to more expensive maintenance costs down the line. If you just pay for small, less expensive projects with cash, this can prevent you from depleting your savings too quickly.
#2. Home Equity Line of Credit
A home equity line of credit (HELOC) is a line of credit borrowed against the available equity of your home. Your home equity is the difference between the appraised value of your home and your current mortgage balance.
In practice, a HELOC is similar to a credit card. It provides a set credit limit, and you can borrow as needed, only paying interest on the amount used. This makes it a flexible option for large or unexpected expenses.
The amount you can borrow depends on your loan-to-value ratio, the principal divided by the value of the property. Typically, lenders will allow you to borrow up to 80% and sometimes 90% of your home equity.
#3. Construction Loan
A construction-to-permanent loan distributes funds throughout the project, and once the project is complete, the loan is refinanced into a traditional mortgage, where you’ll make payments to cover the principal and interest.
To determine how much you can borrow, lenders use the after renovation value (ARV), the estimated value of a property after all renovations, repairs, and upgrades are complete. It’s essentially the price you can expect to sell or refinance a property for once it is in its desired condition. Using the ARV could increase your borrowing power and help make larger renovation projects possible.
A Plan That Pays Off
At Hercules Design Build, every renovation project starts with clarity. Early conversations establish the scope of work and budget parameters before decisions are finalized. Homeowners and the design-build team make decisions thoughtfully, and the work is completed with precision.
If you’re ready to explore what your home could become, reach out to Hercules Design Build to schedule your consultation!
