Building your dream home from the ground up is a great way to make sure it meets all your expectations. Securing a home construction loan can assist you in realizing your plans, but you need to know the specifics that come with these types of loans.
Here’s an overview of what you should know when obtaining a construction loan.
What is a construction loan?
A construction loan is a type of loan specifically designed to finance the cost of building a new home or renovation of an existing property. It’s a short-term loan with a variable interest rate, and is typically used during the construction phase of a project.
Unlike a traditional mortgage, construction loans are disbursed in installments as the construction progresses, rather than as a lump sum. This helps to minimize the risk for both the lender and the borrower, as the loan amount is based on the actual costs of construction.
How do construction loans work?
Construction loans are typically offered by specialized lenders or banks and are often secured by the property being built. Borrowers are usually required to provide a detailed construction plan, as well as a budget and timeline for the project. The lender will then release funds as each construction milestone is completed and inspected.
At the end of the construction process, the construction loan will typically be converted into a permanent mortgage. This conversion process can occur automatically or require a separate application and approval process, depending on the lender’s requirements.
3 Types of Home Construction Loans
There are three main types of home construction loans: construction-to-permanent, construction-only, and renovation.
Construction-to-Permanent Loan
With this type of home construction loan, once the home is built, the loan converts to a permanent mortgage. You typically only have to pay closing costs once, which can save you money.
You can also choose to pay interest during the building phase. However, it’s typically a variable interest rate, so your payments will fluctuate. After the home is built, and your construction loan converts to a permanent mortgage, you might be able to choose whether you want a variable rate or a fixed rate.
You may want to consider this type of loan if you have a feasible plan for your house’s construction, and you want to pay it back over time with a reliable monthly payment.
Construction-Only Loan
This type of loan requires full repayment at the end of the construction phase, rather than automatic conversion to a mortgage. This means that you’ll incur two sets of closing costs and have to secure approval for two separate loans.
However, a construction-only loan may require a smaller down payment compared to a construction-to-permanent loan. If you already own a home, you may consider obtaining a construction-only loan initially and waiting to sell your current home to accumulate a larger down payment for a mortgage.
Construction-only loans can be a suitable option for individuals who currently have limited funds but expect to have more in the future. After completing construction, you can apply for a mortgage to pay off the loan.
One potential drawback of this type of loan is that if your financial or credit situation changes during construction, you may not qualify for a mortgage large enough to repay the loan. This can lead to new problems, including the possibility of losing your home before you even move in.
Renovation Construction Loan
Rather than helping you build something new, a renovation loan is designed to help you cover the costs of a major remodel. If you want to turn a fixer-upper into the home of your dreams, but aren’t sure if you have the money for renovations, this type of loan can help.
It’s important to note that these aren’t home improvement loans. A home improvement loan often deals with smaller remodels and is based on how much equity you currently have in the home. Renovation construction loans are about major overhauls.
Typically, you’ll get a loan big enough to cover the costs of renovations as a mortgage. You only apply for one loan, and it’s based on the likely value of the home after the remodel is finished. This can be a big help if you don’t want to try to finance the cost of upgrades after you buy the house.
Expenses Covered by Construction Loans
In general, you’ll find that most construction loans pay for various aspects of a project, including:
Obtaining the land (or the fixer-upper if you’re getting a renovation loan)
Getting the plans for the home
Applying for the permits
Paying the fees associated with construction
Contingency reserves for covering unexpected costs
Closing costs
You might also be able to have interest reserves built into your construction loan if you would rather not make interest payments while your home is being built or renovated.
The idea is that everything you need to complete your home, whether new-built or a renovation, is wrapped up in the loan.
Create a Plan for Your Custom Home
When building a home, you can’t just ask a lender for an appraisal or just get approved for a certain amount. Construction loan lenders expect to see a plan for the construction of the home.
When you apply for a home construction loan, you’ll need to let your lender know the following information:
Size of the home and the lot
Placement of the lot
Home plans (possibly include blueprints)
Materials used to build the home
Types of renovations you plan to make (for an applicable loan)
Timeline for completing the home
Contractors that will be hired
Lenders will dig into this information to decide if you’re a good risk. They want to know that the home, or the lot, will at least be worth something if you default on the loan. Part of the process is understanding that the home will at least be worth what you’re borrowing once it’s finished.
At each stage of construction, and before disbursement is made, the work will have to be inspected. If you choose a general contractor that’s experienced and respected, they can help you provide needed information to your lender, and you can be reasonably assured that they will do good work.
Qualifying for a Home Construction Loan
Now that you have a plan for your new home, it’s time to qualify for your construction loan. In many ways, the process is the same as qualifying for a traditional mortgage loan. The construction loan lender will review your financial situation and decide if you present a relatively low risk. Some of the things that a construction loan provider looks at include:
Credit score: This is the most important element of any home loan, and it’s no different with construction loans. In fact, because there might not be anything of tangible value before construction, you might need an even higher credit score. You typically need a minimum credit score of 680 to qualify, so you need to improve your credit score if you’re not there yet.
Debt-to-income (DTI) ratio: As with a regular mortgage, the lower your debt-to-income ratio, the better off you’ll be. Most lenders require that your DTI be no more than 45% of your gross monthly income.
Down payment: While you might be able to get by with 5% or less for a down payment with traditional mortgages (FHA, USDA, and VA loans famously come with much lower down payments), construction loans are a different story. You’ll likely have to put down at least 20% to make it happen. In some cases, though, as with a renovation loan, you might get away with a lower down payment.
By planning ahead and making sure your finances are in order, you have a better chance of qualifying for a construction loan.
Prepare for a Longer Closing Period
Realize that there are many moving parts to your home construction loan. It’s not just you and your lender involved. You’ve got a builder or contractor as part of the arrangement, and you’re not going to get a lump sum. Instead, the lender will evaluate you and the contractor you choose separately.
Additionally, a timeline for disbursements needs to be set up. Moreover, a lender might need to consider insurance related to the process. Plus, whether you choose a construction-to-permanent or construction-only loan matters a great deal as you negotiate with a lender about your terms.
As a result of these different aspects of construction loans, you might have to allow for a longer closing period. Additionally, you’re likely to see delays and additional costs during the building portion, so making sure you have adequate contingency reserves built into your new home is vital.
Bottom Line
With a construction loan, you can turn your dream home vision into a reality, whether building from the ground up or renovating a fixer-upper. Be aware, however, that a construction loan entails different terms and conditions.
Your lender will not simply grant you the entire loan amount without first ensuring your ability to use it responsibly. You must prove your financial capability and the viability of your construction project. Your lender will keep a close eye on the allocation of funds as the project progresses.
If you have a good understanding of how a construction loan operates, it can be a valuable tool in ensuring you achieve the home of your dreams.
See also: Is It Cheaper to Build or Buy a House?
Frequently Asked Questions
How do I qualify for a construction loan?
To qualify for a construction loan, you will typically need to have a good credit score and a sufficient amount of equity in your property (if you are building on land that you already own). You will also need to provide a detailed construction plan and budget, as well as proof of your ability to repay the loan.
How long does it take to get a construction loan?
The process of getting a construction loan can vary in length depending on the lender and the specifics of your situation. In general, it can take several weeks or even months to complete the application process and receive approval for a construction loan.
How much can I borrow with a construction loan?
The loan amount you can obtain through a construction loan is based on various factors including your credit score, the worth of the property, and your equity in the property. Usually, borrowers can expect to secure up to 80% of the property value. However, the loan amount can differ based on the lender’s policies.
How are funds from a construction loan distributed?
The distribution of funds from a construction loan is typically done in stages, based on the progress of the construction project. The lender will release funds as specific milestones are reached, such as the completion of the foundation, the rough framing, or the final inspection. This process helps to ensure that the funds are used for the intended purposes and that the construction project is proceeding as planned.
Before each release of funds, the lender may require an inspection to verify that the work has been completed to their satisfaction. The exact terms of the distribution of funds may vary based on the lender and the specifics of the loan agreement.
Are construction loans more expensive than other types of loans?
Construction loans can carry higher interest rates and fees due to the higher risk for the lender. However, the total cost of the loan will vary based on the lender, loan type, and loan terms.
Can I use a construction loan to remodel my existing home?
Yes, construction loans can be utilized for renovating an existing home too. Normally, those borrowing must present a comprehensive renovation plan, cost estimate, and demonstrate their repayment capability.
Interest-only mortgages let you pay just the accruing interest on your loan for an introductory period — but they come with high payments once that period ends.
These loans mainly benefit those planning to move or anticipating a big income increase within a decade.
Since the Great Recession, interest-only mortgages have been hard to find due to their high risk.
An interest-only mortgage allows you to pay only the interest on your loan for a set period. This type of mortgage can help you more easily afford the payments in the short term — but not without some drawbacks. Here’s what to know.
What is an interest-only mortgage?
An interest-only mortgage is a home loan that allows borrowers to make interest-only payments for a set amount of time, typically between seven and 10 years, at the start of a 30-year term. After this introductory period ends, the borrower pays principal and interest for the remainder of the loan at a variable interest rate.
In the early 2000s, homebuyers gave in to the instant gratification of mortgages that allowed them to make interest-only payments at the start of the loan, so long as they took on supersized payments over the long term. This was one of the risky practices that contributed to the housing crisis in 2007, leading to the Great Recession. In the end, many people lost their homes.
Some lenders still offer interest-only mortgages today — often as an adjustable-rate loan — but with much stricter eligibility requirements. They are now considered non-qualified mortgages (non-QM loans) because they don’t meet the backing criteria for Fannie Mae, Freddie Mac or the other government entities that insure and repurchase mortgages. Simply put: an interest-only mortgage is a riskier product.
How do interest-only mortgages work?
With an interest-only loan, you’ll pay interest at a fixed or adjustable rate during the interest-only period. The interest rates are comparable with what you might find with a conventional loan, but because you’re not paying any principal, the initial payments are much lower. However, they may still include property taxes, homeowners insurance and possibly private mortgage insurance (PMI).
Even though you’re only required to pay the interest at first, you still have the option of paying down the principal during the loan’s introductory period.
At the end of the initial period, borrowers must repay the principal either in one balloon payment at a set date, which can be very large, or in monthly payments (that also include interest) for the remainder of the term. These payments of principal and interest are going to be larger than the interest-only ones. And, because your principal payments are being amortized over only 20 years instead of 30, those payments will be higher than those of someone with a traditional 30-year loan.
You can refinance after the interest-only period is over, although fees will likely apply.
Example of an interest-only mortgage
Say you obtain a 30-year interest-only loan for $330,000, with an initial rate of 5.1 percent and an interest-only term of seven years. During the interest-only period, you’d pay roughly $1,403 per month.
After this initial phase, with our interest-only loan example, the payment would rise to $2,033 per month — assuming your rate doesn’t change. Many interest-only loans convert to an adjustable rate, so if rates rise in the future, yours will, too (and vice versa).
With a 30-year fixed-rate mortgage for the same amount, you’d pay $1,882 per month. This includes principal and interest, and also accounts for the higher rate on this type of loan — in this case, 5.54 percent.
With both the traditional fixed-rate option and our interest-only loan example, you’d pay a total of about $677,000, with around $347,000 of those payments going toward interest. As you can see, however, you’d ultimately have a higher monthly payment with an interest-only loan. If your interest-only loan requires a balloon payment instead, you’d be on the hook for several hundred thousand dollars.
How to qualify for an interest-only mortgage
Interest-only loans have been harder to come by since the housing crisis of the mid-2000s. Fewer lenders offer them, and banks have set stricter requirements to qualify.
Banks generally only offer an interest-only mortgage to a well-qualified borrower. You’ll likely need:
A credit score of 700 or more
A debt-to-income (DTI) ratio of 43 percent of less
A down payment of 20 percent or more
Solid proof of future earning potential
Ample assets
Should you consider an interest-only mortgage?
The best candidates for an interest-only mortgage are borrowers who have full confidence they’ll be able to cover the higher monthly payments when they arise. This kind of home loan might be right for you if:
You’re in graduate school and want to keep repayments low for now — but anticipate having a high-paying job in future
You have a trust that will start releasing assets at a future date
You flip houses and need to keep expenses down during the remodel
You expect to move before the end of the introductory period
Interest-only loans can be a prudent personal finance strategy under certain circumstances, but they’re not a good idea for everyone. Here are some pros and cons:
Pros of interest-only mortgages
You get more house for your money. You can enjoy a larger home for less money while you save up for a larger mortgage. That’s assuming you have a sound plan in place for when those larger payments eventually kick in. Bankrate’s affordability calculator can help you estimate how much house you can afford.
Interest-only payments are smaller than conventional mortgage payments. The initial monthly payments on interest-only loans tend to be significantly lower than payments on conventional loans, and the interest rate may be fixed during the first part of the loan. Bankrate’s interest-only mortgage calculator can help you determine what your monthly payment would be.
You kick higher payments down the road. You can delay making large mortgage payments or avoid them entirely if you plan to move out of your home before the introductory period ends.
If interest rates are high now, you can avoid them. If rates are anticipated to be lower in the future, you can keep your monthly payments relatively affordable and then reap the benefits of lower rates by the time the interest-only period ends.
Cons of interest-only mortgages
You won’t build home equity. As long as you’re only paying interest, you’re not building equity in your home. And if your home’s value depreciates, you could end up upside-down on your mortgage or risk negative amortization.
You might get an unaffordable payment after the interest-only period. You could encounter serious sticker shock when the interest-only period ends, and your monthly payments suddenly double or triple, or if you have to make a sizable balloon payment at the end of the initial period.
You’ll be at the mercy of market interest rates. If rates have risen since the loan originated, when the intro period ends, you may have a payment much higher than you want.
If your income changes, the home may be unaffordable down the road. Your anticipated future income might not match your expectations, saddling you with more house than you can afford.
Alternatives to an interest-only mortgage
Before you take on this kind of loan, ask yourself: what is an interest-only mortgage going to do for you? Make sure you think long-term.
If you want to avoid this higher-risk form of home financing, you can explore other types of mortgages. Many adjustable-rate mortgages also have a long, low-interest introductory rate period — and, since the payments include some principal, you’ll be building equity during it.
If you’re drawn to interest-only loans because of the low monthly payment, explore government-backed loans like one from the Federal Housing Administration (FHA). These can give you more affordable payments without the future jump that comes with an interest-only mortgage.
Can I change to an interest-only mortgage?
It is possible to refinance a traditional mortgage to an interest-only loan, and borrowers might consider this option as a way to free up money to put toward short-term investments or an unexpected expense. So, how do interest-only loans work as a refi? You would meet the same scrutiny and requirements as you would if applying for a first-time interest-only loan.
The same eligibility criteria for refinancing also apply, and some lenders may raise the bar since it is a higher-risk loan.
In any refinance, you will need to receive a home appraisal and pay closing costs and fees. Refinancing can cost 3 percent to 6 percent of the home’s total amount. In addition, if you have less than 20 percent equity in your home, you will be required to pay PMI.
WEISSPORT, Pa. – A new destination for hand-crafted baskets, pillows, framed artwork, seasonal accents and other home furnishings is set to open this weekend in Carbon County.
Simple Home Pennsylvania, a store offering unique home decor and gifts, including many items made in the United States by artisans and crafters, will hold a grand opening at 11 a.m. March 2 at 500A Bridge St. in Weissport.
The business will operate near The Gorge Eatery in a renovated portion of the Hofford Mill, a late 19th century building that originally operated as a lumber mill.
Simple Home Pennsylvania owner Sarah Kuhn, of Lehighton, labels her new venture a “passion project” and hopes it will help to reinvigorate Weissport’s business scene.
Unlike many of the antique and consignment shops in the area, Simple Home Pennsylvania will carry “more modern and contemporary products,” Kuhn said.
“I’m really excited,” Kuhn said. “There’s not a lot of opportunity for people in Weissport and the surrounding area to shop this kind of way without having to go to Allentown or other places that are a half hour-plus away. The Gorge Eatery has had a lot to do with Weissport’s rebirth, and we’re hoping to help complement that.”
The store will feature a wide array of home decor items, including dried and artificial florals, vases and planters, wreaths and garland, and serving boards and trays.
Customers also will be able to shop throw blankets and pillows; scented items such as soaps, candles and diffusers; and kitchen products such as mugs, cannisters, dish towels, dinner napkins, oven gloves and natural acacia wood cooking utensils.
“We’ll also have some customized items that are local to the area, including pieces featuring Mauch Chunk Lake and Beltzville Lake,” Kuhn said.
With the help of her father, Kuhn renovated the roughly 1,000-square-foot space to include new flooring, counters, wall paint and more.
“My father has flipped a couple of houses in the past, and I’ve helped stage them and given him design ideas on how to remodel them,” Kuhn said. “He’s retired now and spent countless hours helping me remodel the space – making a custom fireplace, adding new flooring, everything.”
Customers also will be able to shop books, including cookbooks and selections in other genres such as how-to, self-help and decorating inspiration, along with “Support Local Farmers” and “Support American Farmers” sweatshirts.
“We’ve gotten a lot of interaction on our Facebook page regarding our support for local farmers and our clothing displaying those messages,” Huhn said. “There’s a lot of excitement for that.”
To celebrate its grand opening, Simple Home Pennsylvania will offer a door prize along with discount coupons (valid on March 2 only).
Going forward, store hours will be 5-8 p.m. Thursdays, 5-9 p.m. Fridays, noon to 9 p.m. Saturdays and 10 a.m. to 4 p.m. Sundays.
Customers also can shop online at simplehomepa.com and place orders for pickup or delivery within 10 miles of the store.
For the latest Simple Home Pennsylvania updates, follow the business’ pages on Facebook and Instagram.
I might get a little sentimental today. This is the 20th anniversary of my — well, really our — weekly column. In addition to feeling old, I also feel grateful.
It was actually slightly more than 20 years ago that I was living in Southern California, working as a freelance writer, when an editor from the Orange County Register called. The paper was launching a monthly regional magazine targeting owners of luxury homes — think Laguna and Newport Beach — and he wanted a column that would be the antidote to potentially pretentious content.
“So,” I said, “you want a column that is not about rich homeowners and their chichi architects and their museum-quality art collections and the exquisite homes they build on the bluffs overlooking the Pacific and how the whole experience was one giant lovefest, and they had money left over?”
“Right,” he confirmed, “a reality column.”
He’d found the right writer. At that point, I had built two homes from the ground up, had the debt and cortisol levels to prove it, and had an arsenal of frustrations.
Still disbelieving, I added, “You want me to write about the tile mason with the drinking problem, the neighbors who won’t speak to you because you’ve had an outhouse and a Dumpster parked in your front yard for three months, the dogs who got so fed up with the construction they ran away in search of a rescue, and about how the remodel took three times as long, cost three times as much, and you weren’t speaking to your spouse at the end?”
“Exactly,” he said. “Sprinkle in some advice. Be the girl next door who has the same problems as everyone else but is two steps ahead, because you’ve made the mistakes and know who to call.”
Eighteen months later, my then-husband and I moved from Southern California to Colorado — just one of my many moves. And soon, I had a syndicated column. That former editor congratulated me, then ominously added: “It’s great to have a weekly column, but one day, you are going to run out of ideas.”
Until then, a dry well hadn’t been on my worry list. I flashed back to when I was in kindergarten and got in trouble for talking too much in class. I wound up in the principal’s office with my mother to discuss “the problem.” When the principal asked why I talked so much, the answer was easy. “I just have so many important things to say,” I said, which was unintentionally hilarious.
So here we are 20 years and 1,040 columns later, and I still have things to say and no shortage of topics. Because I have never been able to see where home design stops and home life begins, my columns are about both. Here’s a brief look back at some of the moments we’ve been through together:
The calamities: You were there when my two custom seven-foot sofas arrived with the upholstery fabric inside out, when the back patio in our new Colorado home fell three feet into a sink hole, and when our rescue dog on his first night with us tested our commitment on the one-day-old living room carpet. (Who gets a new dog and new carpet on the same day?)
The many moves: You were there through 10 houses and nine moves, including the move to Florida, where I had a stint as a live-in home stager and moved six times in four years.
The life changes: You were there when I sent each of my children off to college, entering some sort of self-imposed dorm-decorating contest in which I was the sole contestant. You were there through my divorce and remarriage, the loss of two parents and the gain of three grown stepchildren.
The micro and macro: Together, we’ve covered the minor (how to choose drawer knobs and tea towels) and the major (the meaning of home and belonging and how to leave a meaningful legacy.
Across the United States, many homeowners are saying yes to renovating their homes in 2024.
Key findings from Opendoor’s 2024 Home Decor Report reveal that Americans plan to spend an average of $5,635 on home remodeling projects this year. This money will be invested to breathe new life into their existing spaces.
See: 10 Expenses Most Likely To Drain Your Checking Account Each Month Learn: How To Get $340 a Year in Cash Back — for Things You Already Buy
What are Americans prioritizing with their home renovations? GOBankingRates spoke with several experts in the renovation business to learn more about homeowner ideas for improving their spaces in the year to come.
Updated Kitchen Appliances
Investments are being made in the kitchen this year, especially when it comes to updating appliances. According to Opendoor’s report, updated kitchen appliances may potentially help with resale value when and if homeowners decide to sell their homes.
When deciding which appliances to replace, Stephanie Duncan, senior home designer at Opendoor, recommends opting for sleek, stainless-steel appliances. These appliances, like a new refrigerator and stove, should inspire potential buyers to imagine life in that kitchen — and encourage them to make an offer right away.
As an additional shopping pro tip, Duncan said you don’t need to buy the most expensive appliances on the market.
“While it is important to have updated appliances, it is not necessary to buy the top-of-the-line options. Not overspending on the most luxe brands will ensure people see a return on their investment,” said Duncan.
View: 4 Red Flags as You Check Your Bank Statements Every Month More: How To Survive on $500 a Month: A Frugal Living Guide
Sponsored: Owe the IRS $10K or more? Schedule a FREE consultation to see if you qualify for tax relief.
Stained Wood Makes a Comeback in the Kitchen
Stained wood tones are making a comeback in kitchens as more homeowners move away from head-to-toe white kitchens. Julie Hampton, interior designer and project director at Freemodel, said some of the popular stains she sees range from light cerused oak to inviting medium hickory shades.
The good news for buyers is that it’s cost-effective to shift cabinet finish from paint to stain. According to Hampton, homeowners who choose stain over paint can save $3,000 to $5,000 on their project.
Related: What Is the 75/15/10 Rule? A Simple Path to Financial Wellness
Upgraded Kitchen Cabinet Hardware
The spotlight is on kitchen cabinets and cupboards this year.
Buyers trying to avoid overspending on their kitchen renovations are recommended by Duncan to upgrade knobs and handles on their cabinets or cupboards. Switching the hardware out is an effective way to upgrade these spaces without needing to buy new pieces.
Storage as a Decorative Element
Buyers this year are getting inspired by organization-themed TV shows, Instagram Reels and TikTok when it comes to kitchen storage for specific purposes.
Amber Shay, national VP of design studios at Meritage Homes, has seen everyday items, like snacks and supplies, being organized into specific pantry containers. Shay said there’s also storage being used as a decorative element with containers in fun colors and designs to match the décor scheme.
For the full kitchen, Hampton said buyers can expect to spend $3,000 to $6,000 on customizing cabinet interiors. Other options to explore, if you have a big budget to work with, include appliance garages or pantries with pullout shelves.
Those on a budget can still customize their cabinet interiors. “Homeowners should budget $150 to $1,200 for each cabinet to add options such as drawer pullouts, appliance lifts or converting a cabinet with doors to drawers,” Hampton recommended.
Read: 5 Frugal Habits of Barbara Corcoran
Sanctuary Bathrooms
The primary bathroom is getting a makeover as a relaxing retreat inside homes.
Buyers seeking to create a luxurious, spa-like atmosphere in their bathrooms are recommended by Shay to explore the following investments:
Adding vintage rugs, art and other décor to make the primary bathroom look and feel like a welcoming place of respite. (Opendoor’s survey notes Americans spend an average of $1,599 per year on home décor.)
Embracing matte black. “A matte black faucet seamlessly blends with on-trend iron and aged brass light fixtures in a bathroom,” said Shay.
Using plants as accessories. This helps bring the outside indoors.
Hotel-Style Living Rooms
Buyers don’t need to spend a lot of money to create a stylish living room that they love.
“Think of items like upscale hotel-style bedding, monogrammed towels, cozy throw pillows or a stylish mirror. You can keep your eye out for original art when you’re on the hunt for furniture at thrift stores,” said Shay.
“Also, consider investing in a high-quality area rug that’s designed to look like a priceless heirloom — it can set the tone for the entire space,” she added.
Discover: 9 Frugal Secrets I Learned From Growing Up Poor
Eco-Friendly Laundry Room Solutions
More homeowners are prioritizing eco-friendly solutions in their laundry rooms.
Hampton uses the example of homeowners choosing to air-dry clothes instead of putting them into the dryer. This choice is both environmentally friendly and causes less damage to garments.
“Laundries may include pullout drying racks that are hidden in the cabinets to maintain the aesthetic,” said Hampton. “Popular systems with installation cost around $1,500.”
Interior Painting Is the Second Remodeling Priority
According to Opendoor’s survey results, kitchens are the number-one remodel priority for homeowners with the number two slot going to interior painting. (New lighting fixtures and new floors take the third and fourth priority spots, respectively.)
As far as which colors are popular with buyers, Duncan said subdued greens and blues are emerging to the forefront. Both shades offer grounding and stability to homeowners.
Shay also agrees with Duncan’s color assessment, adding in her color recommendations of sea blue and darker, moody blues for interior painting.
Buyers who choose sea blue will be able to complement any marble and other natural stones in a space or use it as a fun accent while a moody blue is ideal for a sophisticated and dramatic space. If you dare create a bolder look in your home, Shay said to use dark blue as an interior wall or ceiling color or for painted cabinets and furniture.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Experts: Here Are 8 Home Renovations Buyers Want the Most in 2024
There are plenty of trends that used to be mostly popular among the low-middle income people that changed when they became popular with rich people. Whether it is a band, a clothing style, or a hobby, nothing remains the same once wealth and status get involved. But what are some of the things that poor people loved before they were spoiled by the wealthy? Here, we look at 20 things that once brought joy to those without much money—until their newfound popularity caused them to be re-crafted as symbols of luxury and extravagance.
1. Industrial, Warehouse Apartments
One user shared, “Living in warehouses in the industrial, rundown side of town.”
Another user agreed and commented, “Yes! They tore down all the real lofts to build condos they call lofts.”
2. Etsy
“Etsy,” posted one user.
Another user commented, “There are SO many accounts for cheap stuff from China that you could get on many other websites as well. No, I come to Etsy for homemade stuff and to support artistic individuals.”
One user added, “Yep, I remember trying to avoid the temptation of Shein by almost buying some unique pearl belly dance waist chains from there for 20 dollars. Dear reader, they were from Shein, without the tags and with a hefty 200% price increase. Thank God for the reviewer who exposed them.”
3. Food banks
One Redditor unfolded the riches’ hack and posted, “Food banks. My local food bank put out a news article basically saying that rich people need to stop using the food bank as a ‘life hack’ to lower their grocery bills.”
One user grasped and commented, “OMG. That’s so evil. Some people really have no conscience.”
4. Living in Arty Neighborhoods
One Redditor shared, “Living in arty neighborhoods.”
Another user replied,” This is what I was looking for. Creative poor people have been investing in poor neighbourhoods forever. They use their talent to make it an excellent place they enjoy living in. The rich say, ‘Hey, I want to be cool, let’s buy this.’ And then they price the poor out of the haven they created and turn it into a stale, crowded, overpriced place. TL;DR—Gentrification”
5. Champion Brand Clothes
“Champion brand clothes. I had a lot when I was a kid because it was the cheapest possible, and now all that s- is considered ‘vintage,’” posted one user.
Another responded, “Reminds me of Fila and Puma.”
6. eBay
An online Redditor commented, “Ebay. It used to be so useful to get all kinds of cheap or unique things. Then more and more big commercial sellers joined the club, and eventually, eBay itself forgot about what and who made their platform a success in the first place.”
“I’ve had my eBay account since ’98 when you had to send physical checks/money orders through the mail. It felt like an online flea market or garage sale where you’d get to know certain buyers and sellers. Feedback was critical, and you never bid on something you didn’t plan to buy because any hit to your reputation was a huge deal.
“It was a nice little collecting community until they allowed resellers of knock-off goods in and turned the whole thing into another Amazon. I occasionally still sell collectibles, but the number of people who don’t bother paying is huge now. I miss old eBay,” stated one user.
7. Blue-Collar Residential Neighborhoods
One user also shared, “Blue-collar residential neighborhoods in the city.”
Another user commented, “Yes! This is my answer, too. Not just houses in general but poor neighborhoods, in particular, are being f- over. You can see the tale here in the property history on Realtor.com. Lots and lots of houses were previously on the market for $50,000, bought, and then flipped and listed for $250k to $300k in a ZIP code where the median income is $34.5k, a good $20k less than the median income for the city. Shockingly, no one wants to spend $300k for a s- remodel in the ‘hood, so most of these houses sit empty unless/until they’re put on Airbnb.”
One added, “I think the problem with gentrification in the US is twofold: a failure to provide a path to ownership for often at-risk residents (which leads to slumlords) and a failure to protect the at-risk pop who DO own property from massive tax hikes.
“No one is opposed to tearing down condemned houses and building new ones, but the neighbours who have been there should not get affected by massive tax increases.”
8. Rural Lake Cabins
“Quiet out-of-the-way country cabins sitting by lakes. Now they are overpriced Airbnbs,” posted one user.
Another user commented, “I’d even say Airbnbs themselves. They started as a potentially cheap alternative to hotels run by people with extra space they aren’t doing anything with. Now people build guest houses specifically for Airbnb and treat It like a full-on rental.”
One user suggested, “If you do decide to go to an Airbnb as a getaway, I’d recommend looking for one on a farm. From what I’ve seen, they’re usually run by the farmers as a sort of side gig and not some company or wealthy person.
“The last one I went to was out in the middle of nowhere with like 70 acres that you’re free to explore, and it was actually at an animal rehabilitation center. They rented out their spare room as an Airbnb as a way to bring in more money to put towards the animals. It was insanely cool.
“They had a ton of animals that were being rehabilitated. The living room had a giant window that looked straight into the snow macaque enclosure. It was their inside feeding area, so you could watch them chill and eat like 2 feet away. There was a flock of chickens that would follow you around; most of them were bald or had b-m legs or other issues that would get them slaughtered at a farm. There were storks, peacocks, a very playful otter, spider monkeys, a d-head heron that kept pecking at my boots, boxes, and a lot more, but they even had tigers. Apparently, they were rescued from a carnival and couldn’t be released into the wild. It was so calm and also sweet to know that you were contributing a bit just by staying there.
“Edit: guess I should’ve included it in the original comment. It’s called ‘The Suite at the Ridge’ in Hocking Hills, Ohio. The Airbnb itself wasn’t crazy lovely or anything, but it was perfectly fine, and you’re there to be around the animals anyways. Unfortunately, I can’t post pictures here because I have some I’d love to share.
“Edit 2: I can’t seem to get the listing to show up in a search, only by looking through messages and it says that the host ‘no longer has access to Airbnb’ so I’m not sure what happened. We went in January, so it wasn’t even a year ago. But if you want to look at other sites, the sanctuary is Union Ridge Wildlife Center.
“Edit 3: Don’t Google the name of the wildlife center unless you want my happy post to become a sad post. Turns out it wasn’t as wholesome as I thought it was.”
9. Van Life and Tiny Houses
One online user stated, “Van life and tiny house living.”
Another user replied, “It’s like they gentrified the trailer park.”
Another user commented, “Not where I live. We still have proper trailer parks loaded with meth, pit bulls and domestic violence.”
10. Modernizing a Historic Home
A user commented, “Buying a “fixer-upper” home and spending weekends working on it. I was really looking forward to that.”
One user responded, “I’ve seen so many nice period houses completely gutted on the inside by modern renovations. If I buy a 1930s house, I don’t want a stupid Scandinavian minimalist interior!”
11. Thrift Shopping
“Thrift shopping. I’m not *thrifting* I’m f- broke,” one user commented.
Another user added, “Sometimes I feel like it’s cheaper to buy clothes at Target or Walmart brand new than it is to buy from a thrift store.”
12. Counterculture-Based Festivals
A Redditor stated, “Counterculture-based festivals. Burning Man was on my bucket list until rich folks started showing up with bodyguards and started establishing private zones.”
One user added, “Counterculture as a whole seems to be getting gentrified. In the Netherlands, there are a lot of places you can go to that have a ‘counterculture aesthetic’ or more specifically, ‘squat aesthetic’ but have exorbitant prices. Squatting used to be vast, and multiple venues in the Netherlands (like Paradiso and Melkweg) have their humble beginnings as a squat. Ruigoord, a village close to Amsterdam that got squatted 50 years ago, also completely lost its soul and is filled with yuppies.
“Counterculture is being gentrified, sanitized and sold back to people at exorbitant prices as something ‘new, weird and hip.’”
13. The Farmer’s Market
One user posted, “Going to the farmers market.” A user replied, “I went to a farmer’s market where only one vendor sold fruits and vegetables. There were three boutique honey stands and an old white lady selling ‘native’ art. St Philips Plaza in Tucson, for anyone who knows what I’m talking about. So dumb.”
14. Houses
“Houses. We poor people would work our entire lives to own one. Property became a great investment and a way to increase wealth, so rich people bought them. Not to live in as intended but to rent to the poor and keep them poor by renting so they will never be able to save enough to afford their own.” a user added to the thread.
15. Fajitas
One Redditor shared, “Fajitas. I remember being able to get skirt steak really cheap and sometimes for free.”
One user replied, “That goes for any ‘cheap’ cut of meat.”
16. Pickup Trucks
“Pickup trucks. They used to be much cheaper,” one user posted.
Another user replied, “They’re luxury minivans now.”
17. Unrestricted Land
One user posted, “Unrestricted land. Everything gets an HOA now, and they try to force you into their jurisdiction.
“My family fought an HOA targeting my grandmother’s house. She had lived there for ten years before the HOA was even an idea, or the new area with big houses was cleared for construction before that.
“We ended up having Rock in her house, skirting, and rock under her deck due to insufficient money to fight an HOA she never signed on to.
“If an HOA comes out where I live (which might happen in the next 15 years), I will fight them tooth and nail for spite alone.”
18. Cheat Cuts of Meat
“Off cuts of meat,” shared one user.
Another user replied, “I remember when chicken wings were 10 cents because they could not give them away. Now, they are an industry. They break a wing in half and call it two wings.”
19. Concerts and Festivals
One user shared, “Concerts and festivals.”
Another Redditor added, “I agree with this one. I have lost all interest in the concert/festival experience.”
20. Brisket Burnt Ends
“Brisket burnt ends. BBQ joints used to toss them or give them away for free,” One commenter added.
Another user replied, “BBQ used to be poor people’s food. Nobody wanted to eat ribs and brisket because they are hard to cook. Now every upper-middle-class person has a smoker, and BBQ costs an arm and a leg.”
Do you agree with the things listed above? Share your thoughts below!
Source: Reddit.
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Do you know the return on investment (ROI) of your renovation project?
Some renovations can make your home more valuable. However, other projects may provide very little or no return. If you’re investing in a home renovation in hopes of recouping that money when you sell, it’s important to research and plan ahead before you begin to ensure you’re spending your money wisely.
Home renovation projects of all types are on the rise. In a recent study, 55% of homeowners reported renovating a part of their home in the past year.
But how many of these homeowners will see a return on their investment?
It depends. Getting a full recoup of remodeling costs isn’t very likely. And while smaller DIY projects probably won’t break the bank, homeowners should address whether a project is worth its weight in salt — especially before diving into large-scale remodels.
Keep in mind, though, that you can still potentially increase your home’s equity even if you don’t fully recoup the cost of certain improvements. Equity is the difference between your home’s current market value and the amount you owe on your mortgage. A home upgrade that doesn’t fully pay for itself dollar-for-dollar in terms of increased home value may still boost your home’s overall market value, thereby increasing your equity.
10 Home Improvements That Add Value
A way to determine whether a home improvement makes sense is to look at a project’s cost vs. its value assessment. This resulting renovation-to-resale value assessment number, “cost recouped,” can then be used to rank the financial benefit of comparable projects across the country.
Take a look at these popular home improvement projects and their ROI values. You may be surprised at what tops the list.
HVAC Conversion | Electrification
Job Cost: $17,747
Resale Value: $18,366
Cost Recouped: 103.5%
Garage Door Replacement
Job Cost: $4,302
Resale Value: $4,418
Cost Recouped: 102.7%
Manufactured Stone Veneer
Job Cost: $10,925
Resale Value: $11,177
Cost Recouped: 102.3%
Entry Door Replacement | Steel
Job Cost: $2,214
Resale Value: $2,235
Cost Recouped: 100.9%
Siding Replacement | Vinyl
Job Cost: $16,348
Resale Value: $15,485
Cost Recouped: 94.7%
Siding Replacement | Fiber-Cement
Job Cost: $19,361
Resale Value: $17,129
Cost Recouped: 88.5%
Minor Kitchen Remodel | Midrange
Job Cost: $26,790
Resale Value: $22,963
Cost Recouped: 85.7%
Window Replacement | Vinyl
Job Cost: $20,091
Resale Value: $13,766
Cost Recouped: 68.5%
Bath Remodel | Midrange
Job Cost: $24,606
Resale Value: $16,413
Cost Recouped: 66.7%
Window Replacement | Wood
Job Cost: $24,376
Resale Value: $14,912
Cost Recouped: 61.2%
Source
Pre-Renovation Checklist
Long before you start tearing down walls or ripping up floors, you should consider the following:
Have you budgeted for the renovation costs?
Is the remodel a temporary fix or a long-term lifestyle change?
How long do you plan to live in the home?
Can you afford the renovation without recouping a full or near-full ROI?
How long will the renovation last?
Will the improvements add value to your home equity?
Still unsure if your project is worth the cost? Here’s a more in-depth look at the questions above.
Don’t Guesstimate Your Renovation Budget
No matter how much you try to nail down a renovation budget, there will likely be unforeseen costs along the way. Plan ahead by getting a clear view of how much you can spend.
Talk to contractors, compare their rates and get your priorities in check. It’s easy to spring for granite countertops over laminate when you’re visiting the showroom, but if you need to rewire your electrical system to install the new kitchen appliances later, you might need more funds.
Quick Fix or Lifestyle Upgrade?
While the size of a project is largely dependent on budget, in some cases, a quick-fix repair may cost more money over time than a large-scale renovation that solves a major headache.
For example, if mold is growing on your first-floor ceiling due to a leak in an upstairs shower, you may consider replacing the grout as a short-term, low-cost solution. However, you should have the house inspected to determine the best way to address the issue — mold can be a more extensive problem than first meets the eye. Depending on the damage, you may need to completely redo the tile, drain and pipes and you could require professional mold remediation.
Getting professional advice now will help you pass an inspection later in case you decide to sell.
Will You Stay — A Forever Home or Prepping for a Sale?
If you’re preparing to put your home on the market, ensure your renovations appeal to buyers. One of the biggest misconceptions among homeowners is that major home improvements equate to more money in the final sale. That’s not always the case. If you’re planning to stay in your home for several years, make sure you can realistically live with the changes long term.
Research Your Project’s Regional ROI
It’s essential to consider the value of renovations in your region — not just on a national scale. In colder climates, energy efficiency projects may reap more value, while a swimming pool may dissuade buyers. On the other hand, in warmer regions, a pool may attract buyers to your home.
Adding additional rooms or square footage is one of the most impactful ways to increase your home’s value. An appraiser will be able to compare your home to those in your area who fall into the larger square footage category. Additional space can be used as an office, playroom or entertainment area, making it a worthwhile investment.
Considerations of Living Onsite While Renovating
Home improvement projects can get stressful and can’t always be completed over the weekend. Be sure to plan a realistic project timeline and make arrangements to get through the renovation chaos. With major renovations, it’s often pragmatic to set aside funds. If you’ll have to spend several hours away from home while the contractors complete their work, you may need to stay overnight in a hotel or plan a fun day out.
Also, be aware that when renovating or doing major construction on your home, you will be unable to refinance during that time. This is because an appraisal is typically required, and the home must be in safe and functional condition.
Increased Home Equity Benefits
Sometimes, home improvement projects solely benefit you — and that’s OK! Increasing your home’s value has several benefits. If you’re staying in your home, you might be able to apply the equity to secure a home equity line of credit (HELOC), a home equity loan (HEL) or even a cash-out refinance to help pay off debts, pay for college tuition or purchase a new car, for example.
If your home is on the market, your home improvements could help it sell faster and for more money. However, keep in mind that if you want to attract investors, most require a home listing to be off the market for a certain period of time before they can consider investing in it. Typically, this time ranges anywhere from six months to a year, even if the home was only listed on the market for one day.
Remodeling Mistakes to Avoid
When it comes to making home improvements, too often, homeowners rely on instinct rather than research to decide which projects to embark on. So, while converting the garage to an extra bedroom might seem like a good idea, the inconvenience of street parking isn’t likely to entice a potential homebuyer anytime soon.
Some other remodeling mistakes to avoid:
Underestimating project costs. It’s important to fully understand your project’s size, scope and complexity. Consider the supplies, skilled professionals, inspections and permits that may be required, and any systems, such as electrical or plumbing, that will be affected and impact your costs.
Not anticipating issues. Things don’t always go according to plan. Ensure you have a buffer of funds to manage unexpected issues that may arise.
Having an unrealistic timeline. Major gut renovations can take months to design and build, which leads to higher labor costs. Can you live in your home through the renovation if it takes longer than anticipated? Do you have a contingency plan?
Not doing your research. If you want to enhance your home’s resale value, do your homework to ensure your upgrades will help you maximize your investment.
Don’t Rely on Reality TV for Ideas
Did you know that one of the most valuable home investments is adding fiberglass insulation to a home’s attic?
Probably not. But watching contractors stuff the ceiling with insulation on popular home improvement shows just isn’t as interesting as watching designers discuss the layout of a total kitchen overhaul, complete with high-end fixtures, granite countertops and top-of-the-line commercial-grade appliances.
An overly pricey, sophisticated kitchen may backfire once a home is back on the market. A minor kitchen remodel, on the other hand, such as painting the cupboards or replacing laminate flooring with ceramic tiling, not only provides a more cost-effective solution for homeowners, but may also yield a higher return on their investment. Painting kitchen cabinets is an inexpensive cost to a homeowner because they can be painted on-site instead of at a warehouse and then shipped.
Make Your Home Improvement Plan
Whether you’re a first-time homebuyer with a growing family or a near-retiree looking to sell and downsize, it’s important to understand which home improvement projects make the most sense for you.
If you’re renovating with ROI in mind, consider how prospective homebuyers will view your interior, exterior, outdoor space and landscaping. Focus on projects that improve your home’s functionality and appeal to a wide range of buyers. And remember, even relatively small renovations can still increase your home’s value and equity.
Talk to a real estate agent to get their guidance on which projects may have the biggest impact on your home’s value. If you’re ready to begin your next exciting remodeling project, inquire about a home equity loan that turns your current home equity into cash. Reach out to a Pennymac Loan Expert and find the option that’s right for you.
A home equity loan allows you to borrow a lump sum against your home’s equity, usually at a fixed interest rate that’s lower than other forms of consumer debt.
The amount you can borrow with a home equity loan is based on the current market value of your home, the size of your mortgage and personal financials like your credit score and income.
Home equity loans are best used for five-figure renovation or repair projects — which can garner you a tax deduction on their interest — or to consolidate other debts.
Home equity loans drawbacks include putting your home at risk of foreclosure and their lengthy application process.
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What is a home equity loan?
A home equity loan is a type of second mortgage secured by the equity in your home. It offers a set amount at a fixed interest rate, so it’s best for borrowers who know exactly how much money they need. You’ll receive the funds in a lump sum, then make regular monthly repayments amortized over the term of the loan, typically as long as 30 years.
Because your home is the collateral for the loan, the amount you’ll be able to borrow is related to its current market value. The interest rate you receive on a home equity loan (as with other loans) will vary depending on your lender, credit score, income and other factors.
Home equity loans in 2024
While the housing sales have cooled in some areas in recent months due to higher mortgage rates, housing prices have continued to post gains – good news for the net worth of American homeowners. According to the Board of Governors of the Federal Reserve System, U.S. households possess a collective $32.6 trillion in home equity as of the third quarter of 2023.
That’s a record high, and it means that the vast majority of homeowners are sitting on a huge pile of equity that they can leverage to access cash, including through a home equity loan. In fact, according to TransUnion’s latest “Home Equity Trends Report,”, the median amount of tappable equity per homeowner is $254,000, and some householders are in an even better position: 5.8 million of them have more than $1 million of available equity.
2023 saw a reversal in the demand for tapping all that equity. As rates jumped, the number of borrowers interested in home equity loans – along with HELOCs, their line-of-credit cousins – dropped in the back half of last year. TransUnion’s data shows that HELOC originations in the third quarter of 2023 fell by 28 percent versus the year before. Home equity loans were only down by 3 percent, though – perhaps a reflection of a homeowner’s confidence in the predictability of a fixed-rate home equity loan versus the volatility of variable-rate HELOC (more on that below).
10.16%
The average $30,000 HELOC rate as of the beginning of January 2024 — up from 7.62% in January 2023.
Source:
Bankrate national survey of lenders
As for 2024: The potential for Federal Reserve interest rate cuts could be good news for home equity loans. While the forecast doesn’t call for massive savings — for HE loans, anyway — any reduction in borrowing costs saves prospective borrowers some cash, and encourages them to turn to this financing tool.
What are average home equity loan interest rates?
As of late January 2024, home equity loan rates for the benchmark $30,000 loan are averaging just under 9 percent, within a tight range of 8.5 to 10 percent. While high compared to their average of six percent in 2022, that’s significantly lower than other forms of consumer debt. Credit card rates are lingering above the 20-percent mark, and personal loans can stretch into the 25–35 percent range for borrowers with less-than-perfect credit scores.
How does a home equity loan work?
When you take out a home equity loan, the lender approves you for a loan amount based on the percentage of equity you have in your home and other factors. You’ll receive the loan proceeds in a lump sum, then repay what you borrowed in fixed monthly installments that include principal and interest over a set period. Although terms vary, home equity loans can be repaid over a period as long as 30 years.
Since the loan is secured by your home, the property is at risk for foreclosure if you can’t repay what you borrowed. If that happens, it can cause serious damage to your credit score, making it harder for you to qualify for future loans.
You can use the funds from a home equity loan for any purpose, but there’s a possible tax benefit if you use the money to improve your home. You can deduct the interest (up to the limit) if the home equity loan is used to “buy, build or substantially improve” the property. To do this, you’ll need to itemize your deductions.
Home equity loan requirements
Lenders have different requirements for home equity loans, but generally, the standards include:
Credit score: Mid-600s or higher
Home equity: At least 20 percent
Employment and income: At least two years of employment history and pay stubs from the past 30 days
Debt-to-income (DTI) ratio: No more than 43 percent
Loan-to-value (LTV) ratio: No more than 80 percent
What should you use a home equity loan for?
Some of the best reasons to use a home equity loan include:
Upgrading your home: Whether you’re looking to remodel your kitchen, add an in-law suite or install solar shingles on your roof, a home equity loan can be a smart way to pay for the enhancements. You’ll be improving your home, which means you get to enjoy living there more; and when you’re ready to sell, the upgrade can potentially make it more attractive (and more valuable) to buyers. Plus, you can qualify for some tax benefits — a deduction on the interest — when you use a loan to invest in the property in this way.
Consolidating high-interest debt: If you’ve been struggling to pay off debts with high costs like credit cards, a home equity loan can make a big difference in the amount of interest you’re paying. However, if you’re considering this route, there are two important caveats. First, you need to have a real commitment to not build those credit card balances up again. Second, the amount of debt needs to be fairly significant. Credit card balance transfers can be a better option if you’re aiming to pay off less than $10,000.
Covering large medical bills: Health care can be incredibly expensive, and medical problems often arise unexpectedly. If you or a family member needs a procedure, treatment or long-term care that isn’t fully covered by insurance, a home equity loan could be a good way to handle the costs.
When you should avoid getting a home equity loan
If you’re thinking about using a home equity loan and any of these describe you, think again:
Covering discretionary spending: You don’t have to go on that pricey vacation for spring break (find something fun to do for a staycation). You also don’t have to host a wedding (go to the courthouse). While both of those kinds of big expenses can be fun, they are not reasons to hock your home. Save for longer, or find a more affordable way to make them happen.
Paying for college: You may find lenders who advocate paying college tuition via home equity, but this is a risky move. There is no guarantee that your child is going to graduate, but there is certainly a guarantee that you need to have a home. Look at taking out federal student loans in your child’s name instead: Their interest rates are lower, and they come with benefits like income-based repayment options.
Paying for a relatively small project: If you only need a small amount of cash – think less than $20,000 – you may be better off looking for other options such as a credit card with a long zero-percent APR period or simply taking longer to set aside some savings.
How much can I borrow with a home equity loan?
To figure out how much you might be able to borrow with a home equity loan, you first need to understand how much home equity you actually have. Your equity is the essentially difference between how much your home is worth and how much you owe on your first mortgage. For example, if your home’s current fair market value is $500,000 and you owe $250,000, you have a 50 percent equity stake.
Most lenders will let you borrow up to 80 percent of your equity stake (some let you go as high as 85 or even 90 percent). However, there’s another factor to consider: How much all your loans amount to or your combined loan-to-value ratio (CLTV). Most home equity lenders will cap your total amount of home-secured debt – including your first mortgage – at 80 percent of the home’s market value. So, in that case, you would likely be able to borrow up to $150,000, taking your total mortgage debt to $400,000 (80 percent of $500,000). Bankrate’s home equity calculator can help you estimate your exact borrowing power.
Home equity loan pros and cons
Pros of home equity loans
Attractive interest rates: Home equity lenders typically charge lower interest rates compared to the rates on personal loans and credit cards. This is because home equity loans are a type of secured debt, meaning they’re backed by some sort of collateral (in this case, your house) — which makes them less risky for the lender, compared to unsecured debt, which isn’t backed by anything.
Fixed monthly payments: Home equity loans offer the stability of a fixed interest rate and a fixed monthly payment. This might make it easier for you to budget for and pay each month. This also eliminates the possibility of getting hit with a higher payment with a variable-rate product, like a credit card or home equity line of credit (HELOC).
Tax advantages: You could be eligible for a tax deduction if you use the loan proceeds to substantially improve or repair the home. Check with an accountant or tax professional to learn more about this deduction and to determine if it’s available to you.
Cons of home equity loans
Home on the line: Your home is the collateral for a home equity loan, so if you can’t repay it, your lender could foreclose.
No flexibility: If you’re not sure how much money you need to borrow (you’re planning a big remodeling project, say), a home equity loan might not be the best choice. Because home equity loans only offer a fixed lump sum, you run the risk of borrowing too little. On the flip side, you might borrow too much, which you’ll still need to repay with interest (though you might be able to settle the debt early, if that’s the case).
Lengthy, costly application: Applying for a home equity loan is akin to applying for a mortgage; though somewhat simpler, it often means lots of paperwork, a long process and closing costs.
What’s the difference between a home equity loan and a HELOC?
A HELOC – short for home equity line of credit – is also secured by the equity in your home and has similar requirements to a home equity loan, it operates a bit differently. With a HELOC, you can borrow money on an as-needed basis, up to a set limit, typically over a 10-year draw period. During that time, you’ll make interest-only payments on what you borrow. This means that your payments may be smaller than a home equity loan, which includes both interest and principal. When the draw period on the HELOC ends, you’ll repay what you borrowed and any interest, usually over a repayment term of up to 20 years. Unlike home equity loans, HELOCs have variable interest rates, which means your monthly payments can change.
Other home equity loan alternatives
A home equity loan and a HELOC aren’t your only options for borrowing against your equity. Some other alternatives include:
Shared equity agreements: Investment companies like Unlock and Hometap offer shared equity agreements, which let homeowners access cash now in exchange for a portion of the home’s value in the future. These arrangements vary, but they all have one upside: You don’t have to make monthly payments, because the money is technically not a loan, but an investment — funds in exchange for a share in your home. However, they all have the same downside: You’re going to make a big payment eventually, and it will likely wind up coming out of the proceeds when you sell the home.
Cash-out refinance: Another option to convert a portion of your home equity into ready money is through a cash-out refi. Unlike a home equity loan, a cash-out refi replaces your current mortgage with a new one for a higher amount, with you taking the difference between the outstanding balance and the new balance in cash. You’ll need to think carefully about a cash-out refi based on the rate attached to your current mortgage. If you managed to lock in a super-low rate during the pandemic, a cash-out refinance is almost certain to lock you into a significantly higher rate.
Personal loans: Personal loans can be a cost-effective route if your credit score is in 760-and-above territory. These are unsecured loans – meaning you won’t have to put your house on the line. However, borrowing limits tend to be lower, and the repayment period will be shorter than most home equity loans’.
Home equity loans FAQ
Taking on any form of debt, including a home equity loan, has an impact on your credit score. After you close on a home equity loan, your score might decrease temporarily. Over time, as you continue to make timely payments on the loan, you might see your score improve, as well.
It varies by lender, but most home equity loans come with repayment periods between five years and 30 years. A longer loan term means you’ll get more affordable monthly payments. That said, you’ll also pay far more in interest. If you can afford the higher monthly payments, selecting a shorter term maximizes overall cost. The ideal is to find a compromise between the two: the maximum manageable payments and the shortest loan term.
Fees for home equity loans vary by lender, which makes it very important to compare offers. Some home equity lenders require you to pay an origination fee and other closing costs, typically between 2 percent and 5 percent of the loan balance. You might also pay a home appraisal fee. Once the loan proceeds are disbursed to you, late fees could apply if you remit payment after the monthly due date or grace period (if applicable).
There are no restrictions on how you purpose your home equity loan. The most common uses include debt consolidation for high-interest credit card balances or other loans; home repairs or upgrades; higher education expenses and medical debts. Some choose to use the funds to start a business, purchase an investment property or cover another major purchase.
Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket.
Home improvement loans let you finance the cost of upgrades and repairs to your home.
Some — like the FHA 203(k) mortgage — are specialized for home renovation projects, while second mortgage options — like home equity loans and HELOCs — can provide cash for a remodel or any other purpose. Your best financing option for home improvements depends on your needs. Here’s what you should know.
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What is a home improvement loan?
A home improvement loan is a financial tool that allows you to borrow money for various home projects, such as repairs, renovations, or upgrades.
Unlike a secured loan like a second mortgage, home improvement loans are often unsecured personal loans, meaning you don’t have to put up your home as collateral. You get the money in a lump sum and pay it back over a predetermined period, which can range from one to seven years.
Now, you might be wondering how this is different from a home renovation loan. While the terms are often used interchangeably, there can be subtle differences.
Home improvement loans are generally more flexible and can be used for any type of home project, from installing a new roof to landscaping. Home renovation loans, on the other hand, are often more specific and may require you to use the funds for particular types of renovations, like kitchen or bathroom remodels.
How does a home improvement loan work?
So, you’ve decided to spruce up your home, and you’re considering a home improvement loan. But how does it work? Once you’re approved, the lender will give you the money in a lump sum. You start repaying the loan almost immediately, usually in fixed monthly installments. The interest rate you’ll pay depends on various factors, including your credit score and the lender’s terms.
Be mindful of additional costs like origination fees, which can range from 1% to 8% of the loan amount. Unlike a credit card, where you can keep using the available credit as you pay it off, the loan amount is fixed. If you find that you need more money for your project, you’ll have to apply for another loan, which could affect your credit score.
Home improvement loan rates
Interest rates for home improvement loans can vary widely, generally ranging from 5% to 36%. Your credit score plays a significant role in determining your rate—the better your credit, the more favorable your rate. Some lenders even offer an autopay discount if you link a bank account for automatic payments.
You can also prequalify to check your likely interest rate without affecting your credit score, making it easier to plan for the loan purpose, whether it’s a new kitchen or fixing a leaky roof.
So, whether you’re dreaming of solar panels or finally fixing up your master bedroom, a home improvement loan can be a practical way to finance your projects. Just make sure to read the fine print and understand all the terms, including any potential autopay discounts and bank account requirements, before you apply.
Types of home improvement loans
1. Home equity loan
A home equity loan (HEL) is a financial instrument that lets you borrow money using the equity you’ve built up in your home as collateral. The equity is determined by subtracting your existing mortgage loan balance from your current home value. Unlike a cash-out refinance, a home equity loan “issues loan funding as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney. “You would continue making payments on your original mortgage while repaying the home equity loan.”
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This kind of loan is particularly useful for big, one-time expenditures like home remodeling. It offers a fixed interest rate, and the loan terms can range from five to 30 years. You could potentially borrow up to 100% of your home’s equity.
However, there are some cons to consider. Since you’re essentially taking on a second loan, you’ll have an additional monthly payment if you still have a balance on your original mortgage. Also, the lender will usually charge closing costs ranging from 2% to 5% of the loan balance, as well as potential origination fees. Because the loan provides a lump-sum payment, careful budgeting is necessary to ensure the funds are used effectively.
As a bonus, “a home equity loan, or HELOC, may also be tax-deductible,” says Doug Leever with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”
2. HELOC (home equity line of credit)
A Home Equity Line of Credit (HELOC) is another option for tapping into your home’s equity without going through the process of a full refinance. Unlike a standard home equity loan that provides a lump sum upfront, a HELOC functions more like a credit card. You’re given a pre-approved limit and can borrow against that limit as you need, paying interest only on the amount you’ve actually borrowed.
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While there’s more flexibility because you don’t have to borrow the entire amount at once, be aware that by the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you can borrow if, for instance, your credit goes down.”
The pros of a HELOC include minimal or potentially no closing costs, and loan payments that vary according to how much you’ve borrowed. It offers a revolving balance, which means you can re-use the funds after repayment. This kind of financial instrument may be ideal for ongoing or long-term projects that don’t require a large sum upfront.
“HELOCs offer flexibility, and you only pull money out when needed, within the maximum loan amount. And the credit line is available for up to 10 years, which is your repayment period.” Leever says.
3. Cash-out refinance
A cash-out refinance is a viable option if you’re considering home improvements or other significant financial needs. When opting for a cash-out refinance, you essentially take on a new, larger mortgage than your existing one and then pocket the difference in cash.
This cash comes from your home’s value and can be used for various purposes, including home improvement projects like finishing a basement or remodeling a kitchen. However, the money can also be used for other things, like paying off high-interest debt, covering education expenses, or even buying a second home. Importantly, a cash-out refinance is most beneficial when current market rates are lower than your existing mortgage rate.
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The advantages of going for a cash-out refinance include the opportunity to reduce your mortgage rate or loan term, which could potentially result in paying off your home earlier. For instance, if you initially had a 30-year mortgage with 20 years remaining, you could refinance to a 15-year loan, effectively paying off your home five years ahead of schedule. Plus, you only have to worry about one mortgage payment.
However, there are downsides. Cash-out refinances tend to have higher closing costs that apply to the entire loan amount, not just the cash you’re taking out. The new loan will also have a larger balance than your current mortgage, and refinancing effectively restarts your loan term length.
4. FHA 203(k) rehab loan
The FHA 203(k) rehab loan is backed by the Federal Housing Administration that consolidates the cost of a home mortgage and home improvements into a single loan, which makes it particularly useful for those buying fixer-uppers.
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With this program, you don’t need to apply for two different loans or pay closing costs twice; you finance both the house purchase and the necessary renovations at the same time. The loan comes with several benefits like a low down payment requirement of just 3.5% and a minimum credit score requirement of 620, making it accessible even if you don’t have perfect credit. Additionally, first-time home buyer status is not a requirement for this loan.
However, there are some limitations and downsides to be aware of. The FHA 203(k) loan is specifically designed for older homes in need of repairs, rather than new properties. The loan also includes both upfront and ongoing monthly mortgage insurance premiums. Renovation costs have to be at least $5,000, and the loan restricts the use of funds to certain approved home improvement projects.
According to Jon Meyer, a loan expert at The Mortgage Reports, “FHA 203(k) loans can be drawn out and difficult to get approved. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.”
5. Unsecured personal loan
If you’re looking to finance home improvements but don’t have sufficient home equity, a personal loan could be a viable option. Unlike home equity lines of credit (HELOCs), personal loans are unsecured, meaning your home is not used as collateral. This feature often allows for a speedy approval process, sometimes getting you funds on the next business day or even the same day.
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The repayment terms for personal loans are less flexible, usually ranging between two and five years. Although you’ll most likely face closing costs, personal loans can be easier to access for those who don’t have much home equity to borrow against. They can also be a good choice for emergency repairs, such as a broken water heater or HVAC system that needs immediate replacement.
However, there are notable downsides to consider. Unsecured personal loans generally have higher interest rates compared to HELOCs and lower borrowing limits. The short repayment terms could put financial strain on your budget. Additionally, you may encounter prepayment penalties and expensive late fees. Financial expert Meyer describes personal loans as the “least advisable” option for homeowners, suggesting that they should be considered carefully and perhaps as a last resort.
6. Credit cards
Using a credit card can be the fastest and most straightforward way to finance your home improvement projects, eliminating the need for a lengthy loan application. However, you’ll need to be cautious about credit limits, especially if your renovation costs are high.
You might need a card with a higher limit or even multiple cards to cover the costs. The interest rates are generally higher compared to home improvement loans, but some cards offer an introductory 0% annual percentage rate (APR) for up to 18 months, which can be a good deal if you’re sure you can repay the balance within that time frame.
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Credit cards might make sense in emergency situations where you need immediate funding. For longer-term financing, though, they’re not recommended. If you do opt for credit card financing initially, you can still get a secured loan later on to clear the credit card debt, thus potentially saving on high-interest payments.
How do you choose the best home improvement loan for you?
The best home improvement loan will match your specific lifestyle needs and unique financial situation. So let’s narrow down your options with a few questions.
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Do you have home equity available?
If so, you can access the lowest rates by borrowing against the equity in your home with a cash-out refinance, a home equity loan, or a home equity line of credit.
Here are a few tips for choosing between a HELOC, home equity loan, or cash-out refi:
Can you get a lower interest rate? If so, a cash-out refinance could save money on your current mortgage and your home improvement loan simultaneously
Are you doing a big, single project like a home remodel? Consider a simple home equity loan to tap into your equity at a fixed rate
Do you have a series of remodeling projects coming up? When you plan to remodel your home room by room or project by project, a home equity line of credit (HELOC) is convenient and worth the higher loan rate compared to a simple home equity loan
Are you buying a fixer-upper?
If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to ensure you understand the disbursement of funds rules.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a more straightforward process.
“The only time I’d recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options as well.”
Do you need funds immediately?
When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.
Which is better?
Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind that if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit
Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.
How to get a home improvement loan
Getting a home improvement loan is similar to getting a mortgage. You’ll want to compare rates and monthly payments, prepare your financial documentation, and then apply for the loan.
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1. Check your financial situation
Check your credit score and debt-to-income ratio. Lenders use your credit report to establish your creditworthiness. Generally speaking, lower rates go to those with higher credit scores. You’ll also want to understand your debt-to-income ratio (DTI). It tells lenders how much money you can comfortably borrow.
2. Compare lenders and loan types
Gather loan offers from multiple lenders and compare costs and terms with other types of financing. Look for any benefits, such as rate discounts, a lender might provide for enrolling in autopay. Also, keep an eye out for disadvantages, including minimum loan amounts or expensive late payment fees.
3. Gather your loan documents
Be prepared to verify your income and financial information with documentation. This includes pay stubs, W-2s (or 1099s if you’re self-employed), and bank statements, to name a few.
4. Complete the loan application process
Depending on the lender you choose, you may have a fully online loan application, one that is conducted via phone and email, or even one that is conducted in person at a local branch. In some cases, your mortgage application could be a mix of these options. Your lender will review your application and likely order a home appraisal, depending on the type of loan. You’ll get approved and receive funding if your finances are in good shape.
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Home improvement loan lenders
When considering a home improvement loan, it’s necessary to explore various lending options to find the one that best suits your needs. The lending landscape for home improvement is diverse, featuring traditional banks, credit unions, and online lenders. Each type of lender offers different interest rates, loan terms, and eligibility criteria.
It’s advisable to prequalify with multiple lenders to get an estimate of your loan rates, which generally doesn’t affect your credit score. This way, you can compare offers and choose the most favorable terms for your renovation project.
Among the popular choices in the market, Sofi and LightStream stand out for their competitive rates, easy online application, and customer-friendly terms. Both are equal housing lenders, ensuring they adhere to federal anti-discrimination laws. In addition to these, other lenders like Wells Fargo and LendingClub also offer home improvement loans with varying terms and conditions.
How can I use the money from a home improvement loan?
When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account. You could pay off credit card debt, buy a new car, pay off student loans, or even fund a two-week vacation. But should you?
It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home. Spending $40,000 on a new kitchen remodel or $20,000 on finishing your basement could add significant value to your home. And that investment would be appreciated along with your home.
That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.
Average costs of home renovations
Home renovations can vary widely in cost depending on the scope of the project, the quality of the materials used, and the region where you live. However, here’s a general idea of what you might expect to pay for various types of home renovations.
Renovation Type
Average Cost Range
Kitchen Remodel
$10,000 – $50,000
Bathroom Remodel
$5,000 – $25,000
Master Bedroom Remodel
$1,500 – $10,000
New Roof
$5,000 – $11,000
Exterior Paint
$6,000 – $20,000
Interior Paint
$1,500 – $10,000
New Deck
$15,000 – $40,000
Solar Panel Installation
$15,000 – $25,000
Window Replacement
$5,000 – $15,000
The information is based on data from HomeGuide.com and is current as of August 2023.
Please note that these are just average figures, and the actual costs can vary. For instance, a high-end kitchen remodel could cost significantly more, especially if you’re planning to use custom cabinetry and high-end appliances. Similarly, the cost of a new deck can vary depending on the size and type of materials used.
Home improvement loans FAQ
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What type of loan is best for home improvements?
The best loan for home improvements depends on your finances. If you have accumulated a lot of equity in your home, a HELOC, or home equity loan, might be suitable. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten the current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.
Should I get a personal loan for home improvements?
That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.
What credit score is needed for a home improvement loan?
The credit score requirements for a home improvement loan depend on the loan type. With an FHA 203(k) rehab loan, you likely need a good credit score of 620 or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC, or home equity loan, for home improvements, you’ll need a FICO score of 680–700 or higher. For a personal loan or credit card, aim for a score in the low-to-mid 700s. These have higher interest rates than home improvement loans, but a stronger credit profile will help lower your rate.
What is the best renovation loan
If you’re buying a fixer-upper or renovating an older home, the best renovation loan might be the FHA 203(k) mortgage. The 203(k) rehab loan lets you finance (or refinance) the home and renovation costs into a single loan, so you avoid paying double closing costs and interest rates. If your home is newer or of higher value, the best renovation loan is often a cash-out refinance. This lets you tap the equity in your current home and refinance into a lower mortgage rate at the same time.
Is a home improvement loan tax deductible?
Home improvement loans are generally not tax-deductible. However, if you finance your home improvement using a refinance or home equity loan, some of the costs might be tax-deductible.
Disclaimer: The Mortgage Reports do not provide tax advice. Be sure to consult a tax professional if you have any questions about your taxes.
Shop around for your best home improvement loan
As with anything in life, it pays to compare all your options. So don’t just settle on the first loan offer you find.
Compare lenders, mortgage types, rates, and terms carefully to find the best loan for home improvements.
Time to make a move? Let us find the right mortgage for you
Many people mistakenly believe they can’t afford to buy a home because they don’t really know what their options are. Fortunately, home loans are not one-size-fits-all. There are various mortgages available to suit your budget and preferences.
So, before you start visiting open houses, take some time to familiarize yourself with the different home loans that are available. Going into the home buying process informed could help you save a lot of money on your down payment, interest, and fees.
The 8 Types of Mortgage Loans Available
Understanding the different types of mortgage loans will help you choose the option that’s best suited for you. Let’s look at a brief overview of the eight types of mortgages available in 2024.
1. Conventional Loans
A conventional loan is a mortgage that’s not issued by the federal government. There are two different types of conventional mortgages you can choose from: conforming and non-conforming loans.
A conforming loan falls within the guidelines laid out by Fannie Mae and Freddie Mac. You’ll take out a conforming loan through a private lender like a bank, credit union, or mortgage company. Since the government doesn’t guarantee the loan, conventional mortgages typically come with more stringent lending requirements.
According to the CFPB, the maximum loan amount for a conventional loan is $484,350. However, it may be as high as $726,525 in counties with a high cost of living. You’ll have to take out private mortgage insurance (PMI) if you don’t have a 20% down payment.
Conventional loans are fixed-rate mortgages, which means your monthly mortgage payment remains the same throughout the entire life of the mortgage loan. The terms typically range from 10 to 30 years:
30-year fixed-rate mortgage
20-year fixed-rate mortgage
15-year fixed-rate mortgage
10-year fixed rate mortgage
Pros:
It can be used to purchase a primary home or an investment property
Tends to cost less than other types of loans
You can cancel your private mortgage insurance (PMI) once you reach 20% equity in your home
Cons:
Must have a minimum FICO score of 620 or higher
Harder to qualify for than government-backed loans
You’ll need to have a low debt-to-income ratio to qualify
2. Conventional 97 Mortgage
A conventional 97 mortgage is similar to a conventional loan in that it’s widely available to various borrowers. The main difference is that with this type of home loan, you only have to pay a 3% down payment.
The program is available for first-time and repeat home buyers. However, it must be your primary place of residence, and the maximum loan amount is $510,400.
Pros:
Widely available to most borrowers
Only requires a 3% down payment
Available for first-time and repeat homebuyers
Cons:
Cannot be used to purchase investment properties
The maximum loan amount is $510,400
Requires a minimum FICO score of 660 or higher
3. FHA Loans
FHA loans are backed by the Federal Housing Administration and are a popular option for first-time home buyers. To qualify, you need to have a 3.5% down payment and a minimum credit score of 580.
If you have a credit score of 500 or higher, you can qualify for an FHA loan with a 10% down payment. These flexible requirements make FHA loans a suitable option for borrowers with bad credit.
To qualify for an FHA home loan, you must have a debt-to-income ratio of 43% or less. These loans can’t be used to purchase investment properties, and your home must meet the FHA’s lending limits.
These limits vary by state, so you’ll need to check the FHA’s website to see what the guidelines are for your area.
Pros:
Loans come with low down payment options
A viable option for borrowers with bad credit
Available for first-time and repeat homeowners
Cons:
Loans can’t be taken out for investment properties
If your credit score is below 580, a 10% down payment is required
You must have a debt-to-income ratio below 43%
Mandatory mortgage insurance premiums
4. FHA 203(k) Rehab Loans
An FHA 203(k) rehab loan is sometimes referred to as a renovation loan. It allows home buyers to finance the purchase of their home and any necessary renovations with a single loan.
Many people purchase older homes to fix them up. Instead of taking out a mortgage and then applying for a home renovation loan, you can accomplish both within a single mortgage.
A rehab loan is similar to an FHA loan in that you’ll need a 3.5% down payment. However, the credit requirements are stricter, and you’ll need a minimum credit score of 640 to qualify.
Pros:
Allows you to buy a home and finance the remodel within one mortgage
Requires a minimum 3.5% down payment
Easier to qualify since the FHA backs your loan
Cons:
Credit requirements are more stringent than typical FHA loans
You must hire approved contractors and cannot DIY the renovations
The closing process takes longer than other types of mortgages
5. VA Loans
The Department of Veteran Affairs guarantees VA loans. These loans are designed to make it easier for veterans and service members to qualify for affordable mortgages.
One of the biggest advantages of taking out a VA loan is that it doesn’t require a down payment or mortgage insurance premium (MIP). And there are no listed credit requirements, though the lender can set their own minimum credit requirements. VA loans typically come with a lower interest rate than FHA and conventional loans.
To qualify for a VA loan, you must either be active duty military, a veteran or honorably discharged. You’ll need to apply for your mortgage through an approved VA lender.
Pros:
No down payment required
No PMI required
Flexible credit requirements
Cons:
Must be a veteran to qualify
Some sellers will not want to deal with a VA loan
6. USDA Loans
A USDA loan is a type of mortgage that’s available for rural and suburban home buyers. It’s a viable option for borrowers with lower credit scores that are having a hard time qualifying for a traditional mortgage.
USDA loans are backed by the U.S. Department of Agriculture, and they help low-income borrowers find housing in rural areas. USDA loans do not require a down payment, but you will need a minimum credit score of 640 to qualify.
You will need to meet the USDA’s eligibility requirements to qualify for the loan. But according to the department’s property eligibility map, over 95% of the U.S. is eligible.
Pros:
No down payment required
A practical option for low-income borrowers
Available to first-time and repeat home buyers
Cons:
A minimum credit score of 640 is required
Housing is limited to rural and suburban areas
7. Jumbo Loans
A jumbo loan is a mortgage that exceeds the financing guidelines laid out by the Federal Housing Finance Agency. These loans are unable to be purchased or guaranteed by Fannie Mae or Freddie Mac.
A jumbo mortgage is financing for luxury homes in competitive real estate markets, and the limits vary by state. In 2024, the FHFA raised the limits for a one-unit property to $766,550, increasing from $726,200 in 2023. In certain high-cost areas, the limits for jumbo loans vary, reaching up to $1,149,825. These jumbo loans are for mortgages that exceed the set limits in their respective counties.
If you’re hoping to buy a home that costs more than $1 million, you’ll need to take out a super jumbo loan. These loans provide up to $3 million to purchase your home. Both jumbo and super jumbo mortgages can be difficult to qualify for and require excellent credit.
Pros:
These loans make it possible to purchase large homes in expensive areas
Typically comes with flexible loan terms
Cons:
Jumbo loans and super jumbo loans come with higher interest rates
You’ll need a good credit history to qualify
8. Adjustable Rate Mortgages (ARMs)
Unlike a fixed-rate mortgage, where the interest rate is set for the life of the loan, an adjustable-rate mortgage (ARM) comes with interest rates that fluctuate. Your interest rate depends on the current market conditions.
When you first take out an ARM, you will typically start with a fixed rate for a set period of time. Once that introductory period is up, your interest rate will adjust on a monthly or annual basis.
An ARM can be a suitable option for some borrowers because your interest rate will likely be low for the first couple of years you own the home. But you need to be comfortable with a certain level of risk.
And if you choose to go this route, you should look for an ARM that caps the amount of interest you pay. That way, you won’t find yourself unable to afford your monthly payments when the interest rates reset.
4 Types of ARMs
There are 4 different types of adjustable-rate mortgages typically offered:
One Year ARM – The one-year adjustable-rate mortgage interest rate changes every year on the anniversary of the loan.
10/1 ARM – The 10/1 ARM has an initial fixed interest rate for the first ten years of the mortgage. After 10 years is up, the rate then adjusts each year for the remainder of the mortgage.
5/5 and 5/1 ARMs – ARMs that have an initial fixed rate for the first five years of the mortgage. After 5 years is up, for the 5/5 ARM, the interest rate changes every 5 years. For the 5/1 ARM, the interest changes every year.
3/3 and 3/1 ARMs – Similar to the 5/5 and 5/1 ARMs, except the initial fixed-rate changes after 3 years. For the 3/3 ARM, the interest rate changes every 3 years and for the 3/1 ARM, it changes every year.
Pros:
Interest rates will likely be low in the beginning.
If you pay the loan off quickly, you could pay a lot less money in interest.
Cons:
Your monthly mortgage payments will fluctuate.
Many borrowers have gotten into financial trouble after taking out an ARM.
Choosing the Right Home Loan
When it comes to choosing a home loan, you need to consider a few key factors. First, you’ll want to think about the type of loan that is best suited to your needs.
Fixed-rate mortgages offer stability and predictability, while adjustable-rate mortgages (ARMs) can be a viable option for those who expect their income to increase significantly over time. You’ll also want to consider your budget and how much you can afford to borrow, as well as the size of your down payment and the length of the loan term.
It’s also crucial to shop around and compare offers from multiple mortgage lenders. While it’s tempting to go with the first lender you find, it pays to do your homework and see what other options are available.
This can help you get a better rate and more favorable terms on your loan. It’s a good idea to get quotes from at least three different lenders, and to consider both traditional banks and online lenders.
Tips for Getting the Best Rates and Terms
One of the most effective strategies is to improve your credit score. Lenders look closely at credit scores when deciding whether to approve a loan. Those with higher scores are typically offered better terms. You can improve your credit score by paying your bills on time, reducing your debt, and correcting any errors on your credit report.
Another tip is to make a larger down payment, which can help you secure a lower interest rate and reduce the size of your monthly payments. Finally, consider working with a mortgage broker, who can help you shop around and find the best deal.
Bottom Line
As you can see, there are many home loans for you to choose from. The type of mortgage that’s best for you will depend on your current income and financial situation.
If you’re not sure where to start, consider working with a qualified loan officer. They can assess your situation and recommend the option that will be best for you.