4 Ways To Fund Your Next Home Remodel Project

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We all know that the more modern and up-to-date we can keep our home, the higher the value we can command from it.  We also know that the areas where you’ll see your greatest return on investment are the bedrooms, bathrooms and kitchen so if you’ve already done your homework on how much your home will be worth after you invest a considerable amount of money into it then you’re halfway through the hard part, but now you have to determine how you’re going to pay for the work to get done.

Here are 5 obvious, and not-so-obvious, ways to get your projects funded to get your home looking new and modern while also investing wisely.  These sources are by no means the only sources of funding, but are ones you possibly didn’t even know existed.

Cash

As they say, cash is king, and it is definitely one way to go about getting your improvement project started, but most families do not have $40k-$50k available in liquid cash to put into their home where they may see the return in a few years down the road.  While we certainly do not encourage consumer debt, you may want to take a strong consideration into other investments you could put that money in and get a better return, especially as we discuss the other funding options.

If you’ve made up your mind that you want to use your cash to fund the entire transaction then we’d recommend getting solid referrals to reputable contractors and creating completion milestones to pay once the work is done.  Do not ever hand over one lump sum payment to the contractor for the entire job, that’s a dangerous move. That might be ok to do with an appliance repairman who is looking at your fridge, but not with a contractor who is replacing an entire kitchen for you

HELOC

A Home Equity Line of Credit, or HELOC for short, allows you to tap into the equity you’ve built up in your home to make your needed repairs.  Just like the name sounds, it’s a revolving line of credit that uses the same concept as your personal credit cards. You can pull from it, up to the allowed credit limit, and then you pay the money back over time.  

The maximum amount you can take out on a HELOC usually caps out around 90% of the market value of your home, less any balances owed on your home.  As an example, If the market value of your home was $400,000 and you owed $250,000 on the mortgage then the most you would be able to borrow, assuming a 90% loan to value ratio, would be $110,000.  This is a sizeable amount, so you don’t want to be reckless with those funds, but if you needed to make other repairs then you would be able to take out more. HELOCs are flexible as your payment timeline can range anywhere from 10-30 years so payments would be relatively low, but interest on a HELOC tends to be higher than other options on this list.  Also, A HELOC is a second mortgage so defaulting on a HELOC can put your home in jeopardy for foreclosure.  

Cash Out Refinance

As the name implies, this is a complete refinance of your mortgage so you’ll need to find a new lender who can assist with this.  This can benefit you if interest rates are now lower than what they were when you first purchased your home. You’ll also need equity in the house as that’s how you’re going to be able to pull out cash from the refinance.  Essentially, you’re tapping into some of your equity through the refinance. Typically a lender is willing to distribute up to 90% of the value of the home.

In this example, if your home was worth $500,000 but you only owed $350,000 then you would be able to walk away with a $100,000 check at closing.  The appeal to this option is another low interest rate on your home (and on the loan) but you also tend to have low monthly payments as they can be extended out for up to another 30 years.  If you did happen to have some cash savings that you wanted to couple with this method, it’s something you would be able to do.

Renovation Loans

This loan is a great alternative to the other mentioned as it is very similar in the way the funds are paid back, however, the main difference between this option and the others is that loan amount available to you is based on the future value of your home, not the present value.  In this example lets say that your home is currently worth $200,000 but with $75,000 worth of renovations and repairs the house would be worth $350,000. If the lender allows you to take up to 90% of the after repair value (ARV) less any balances owed then you would be able to take out up to $115,000.

This loan does have some tighter requirements (these requirements are better if you’re new to the home remodeling game) such as, you’re allowed to complete some of the lighter, more DIY type of work, but the majority of the work must be completed by a licensed contractor.  Payments are disbursed to the contractor after they complete specific milestones on the job and all the material and man hours must be accounted for before you see any funds. For those that are uncomfortable dealing directly with a licensed remodeling contractor then this will put you more at ease as it is a requirement by the lender, not by you.

Whichever route you decide to take, having some extra cash set aside for any hurdles that arise is always a smart choice.  Being tight for cash is never a good thing as it can sway you to make decisions you would have otherwise not have wanted to make, but knowing your options and deciding on the right funding option can be a slam dunk option if you’re ready to take on the risk.