Best Loan For Kitchen Remodel - Learning about home improvement loans may not be as fun as choosing new kitchen cabinets, but you can save thousands of dollars by choosing the right financing option. If you're looking to save a great deal of money on your home entertainment meter, you've come to the right place. Let's begin.
There are many options for financing renovation projects, using everything from loans secured by your home as collateral - such as mortgage refinancing and home equity loans - to personal loans. Here's a quick look at your main options:
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Don't let the length of this list deter you. "Most homeowners are able to do what they need to do with a home equity line of credit or a first-time home equity loan," says Ben Gehde, senior mortgage consultant with Home Mortgage Alliance in Denver. To help the process, this guide provides an explanation in plain English (as opposed to banker's language) of each option, plus the pros and cons.
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Deciding which type of loan is best for you depends on your preferences and several factors, including:
To finance a major remodeling project, you may need to tap into your home equity by using a cash-out mortgage refinance or by taking out a home equity loan or home equity line of credit. In both cases, these are secured loans that use your home as collateral.
To make decisions on mortgage and home equity loan applications, lenders use a calculation called the loan-to-value (LTV) ratio, which compares the loan amount to the appraised value of the home. Although most lenders require an LTV of 80% or less, that equates to at least 20% in home equity.
Your home appraises for $250,000 and you still have $150,000 on your mortgage. Your loan-to-value equation will look something like this:
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Convert 0.60 to a percentage and that gives you a loan-to-value ratio of 60%. That means you have 60% LTV and 40% equity - more than enough to borrow against your home!
Now, to estimate how much you can borrow, you need to calculate your Combined Loan to Value (CLTV), which includes the amount you owe on your mortgage and the amount of your additional home equity loan.
For this example, we'll start with a standard LTV of 80%. So, first you would multiply $250,000 in the appraised value of the home by 0.80:
Next, you'll subtract your outstanding mortgage balance from the CLTV to estimate how much more you can borrow:
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If this kind of math gives you a headache, don't worry. You can use the Nerdwallet home equity loan calculator.
It depends on the type of loan. "You have to have some equity in your home to borrow against it," says Gehde. For loan options without equity requirements, see personal loans, contractor loans, Fannie Mae HomeStyle loans, FHA 203(k) loans, and FHA Title 1 loans. Read on to learn about alternatives.
A home equity line of credit (HELOC) is a line of credit secured by your home as collateral. It usually has a lower interest rate than the unsecured loan option. You can borrow against your HELOC several times over the life of the loan, just like a credit card, and use the funds to finance home renovations or pay other bills. Typically, HELOCs come with a maximum drawdown period of 10 years and a maximum repayment period of 20 years, with minimum payments required each month.
A home equity loan, or second mortgage, allows you to borrow a fixed amount of money using your home as collateral, which is repaid in equal monthly payments over a fixed term or period of time. This is a viable option for someone who has lived in their home long enough to build equity by paying down the mortgage principal. As discussed above, the maximum loan amount will depend on the difference between the current value of your home and the outstanding mortgage balance.
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This option involves refinancing your existing mortgage and borrowing more than you owe to get extra money for your home improvement project or to cover other financial needs. Mortgage refinancing is especially attractive if interest rates have dropped significantly below your existing mortgage. You must have equity in your home to use the cash-out mortgage refinance option.
With a Fannie Mae HomeStyle loan, you can finance your home purchase and renovation with one mortgage instead of applying for and paying off two separate loans. This means you can save money on closing costs and save time on paperwork. This is a great option if you want to finance your home improvement project along with a new home purchase, or refinance an existing home, as Fannie Mae HomeStyle can also be used for home refinancing.
If you don't have home equity, it can also be a viable solution because planned improvements can be counted toward the projected appraised value of the remodeled property. Fannie May HomeStyle loans can be used for owner-occupied, vacation and investment properties, and improvements can be related to luxury maintenance and remodeling.
What is capture? These loans come with more restrictions. For example, money for renovations is held in escrow and paid directly to your contractor. You cannot withdraw the money yourself, like other options.
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This government-issued loan is for borrowers who want to start renovations immediately after buying their home. With this loan, renovation money is set aside and held in escrow for contractor payments. Generally requiring a low down payment, these loans are limited to owner-occupiers and non-profit organizations. Investors are not eligible.
You can consider this loan option if you are not sure what type of home improvement you want when you buy your home. Issued through the Federal Housing Authority (FHA), the funds can be used for work that makes your home livable, efficient, or handicap accessible—but not luxurious. If your appraisal is over $7,500, they will hold your home as collateral.
If you don't have equity, or don't want to use your home as collateral, you can consider a personal loan. In fact, unlike home equity loans, personal loans are unsecured. It means you may not need to put up any collateral at all. However, interest rates are typically higher, loan terms are shorter, and eligibility requirements are stricter.
Many licensed contractors offer financing through loan partners to make it easier for homeowners to move forward with repairs and renovations. While you still have to meet the lender's requirements, they make the process as quick and easy as possible, so you'll be signing on the dotted line. The downside is that interest rates and fees can be higher than other types of loans, and you may have fewer options if something goes wrong with the job or the contractor. However, many homeowners who lack equity or other resources use contractor loans for everything from new roofs, windows, and air conditioning and heating systems to kitchen and master bath renovations.
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While this can be the easiest way to get money to quickly cover necessary home maintenance, it can also be expensive if you can't pay off the balance within a few months. Since credit cards carry high interest, it's best to avoid using plastic to finance any big-ticket home improvements that can't be paid off quickly.
After getting a contractor estimate, most homeowners start with their bank when looking for home improvement financing. You can also try a local credit union or mortgage broker. But don't shop for interest rates alone, because closing costs and fees can make a big difference in your total expenses.
"Most of my clients come from word of mouth," says mortgage consultant Gehde. "They come from previous clients and referral partners like realtors, contractors and CPAs."
In addition to asking friends and professionals for referrals, she suggests looking at online reviews. "You want to connect with someone who has a reputable reputation in the market," he said.
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Your costs depend on the type of loan you choose, but most cover modest closing costs. However, don't let that stop you from diving deeper. "Most homeowners can add closing costs," says Gehde, explaining that loan costs can be included in the financing amount.
For example, if you want to borrow $50,000 for a new kitchen but don't have the $2,500 needed for closing costs, you can finance the extra expenses and borrow $52,500 to cover them. Keep in mind that this means you'll also pay interest on those closing costs.
Typically, home equity, mortgage refinancing and new mortgages will take four to six weeks from start to finish. Personal loans and contractor loans will be faster, with approval decisions as fast as a few hours.
Whether it's routine maintenance, like replacing windows or a roof—or a major home renovation, like revamping your dream kitchen—a home improvement project not only protects your investment, it can increase its value. of your home and increase the joy factor in your life. But before you decide to borrow money, make sure the renovation makes financial sense, especially if you plan to sell your home.
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