Buying a home is one of the most desired dreams of an individual. People put all their efforts & lifetime savings to get a proper living place for their family. But their responsibilities will not be completed after buying a home. Purchasing a property is a form of investment as well as savings. People should also maintain & improve it to get a high yield in future. Like home buying, renovation & improvement procedure has several costs associated with it. Let's have an idea on how to manage those costs & what resources are available as a tool.
Do it on your own
The most budget friendly way to modify the home is to “do it yourself” home renovation. Knowing the market price of the equipment/materials will be essential to estimate the total cost. It is not necessary that high priced products will always be the best. Cheap instruments & material do the needful as well as saves the pocket. But significantly people should realize their capability for doing such works like plumbing, electrical wiring, cutting walls, etc. If anyone does not feel comfortable with these kind of jobs, they need to hire professionals for safety measures & also cost effectiveness.
Hiring a contractor
Contractor is a professional who can manage & complete the home renovation work within a certain time period. In return of his service, he will charge a certain amount as a fee. To select a proficient & cheap contractor, the owner should follow these tips :
1. Asking recommendations from friends & family.
2. Checking out the work he has already done for others.
3. Consulting with others for whom he has completed work.
4. Visiting his business place to verify the authenticity.
5. Verifying the rates he is charging on the material.
6. Getting bids from different contractors before hiring any particular one person.
7. Checking the history of the lender if the contractor is arranging the renovation loan.
After selecting a professional contractor, the work contract will be signed within the two parties. Before signing the papers, the owner must check certain points :
1. The total cost of the renovation work.
2. The total service charges applied by the contractor.
3. How much will be the interest payable on the loan.
4. The total number of monthly payments & the amount of each payment to pay off the entire loan amount.
The owner should sign the final documents after the job done. It should be checked that the work has been done according to the owner's requirements & satisfaction.
Financing the home renovation
The best way to finance the renovation work is to pay it down with hard cash. Paying through credit cards will be another possible option only when the owner can pay off the debt in couple of months. But if the amount is big & the owner can not arrange that in the meantime, the fund can be gathered from a potential lender. The lender will check out some factors before giving the approval. These are :
a) Home equity – Many lenders considers home equity as a prime element before approving the home renovation loan. If the owner has paid 20% of the home value as downpayment & is paying the principal monthly payments, the chances of getting the loan are higher.
b) Credit history of the owner – People with good credit history are generally approved easily by the lenders & offered with best renovation loan offers like any other mortgage loan. People suffering from outstanding debts or defaulting monthly mortgage payments are normally deprived of a good interest rate.
c) Employment & income – A good employment history & a steady per month income will be another important factor while opting for a renovation loan. Lenders often decide the loan terms based on those information.
d) Application & documents – Homeowner must apply for the home renovation loan before several months. Required documents must be provided to the lender at the time of completing the application form. Documents includes financial statements, employment & income proof, papers of existing debt or mortgage(if any). The lender will do credit check to determine the risks involved with the deal & make the terms & conditions accordingly.
After considering the above, the lender will grant the loan. These are types of renovation loan which can be obtained by the potential homeowner:
- Personal loan(Unsecured) - This loan can be borrowed from family members, from a friend or any other person. Banks can also offer personal unsecured loans but for small amount.
The main advantage of this kind of loan is that it does not use the home as a collateral. - Home equity loan - As stated earlier, it totally depends upon the home equity. The benefits of this loan are fixed interest rate & tax deduction.
- Home Equity Line of Credit (HELOC) - It is beneficial if can be used for long -time renovation work. It uses the home equity as collateral & the interest rates vary from time to time. Like home equity loan, it is also tax deductible.
- Employer 401(k) plan - Some of these plan allow a person to take out funds for home renovation work. Interest rates are comparatively lower than other loans & it are exempted from any type of fees. While leaving the job, the borrower needs to pay it off totally or required to serve a massive penalty & taxes.
- Title 1 Loans – Basically its a Federal insured loan provided by the financial banks. To some extent the characteristics are similar to HELOC & Home Equity Loan like payment of interest & closing costs. It also considers the house as collateral though it is not dependent upon the value of existing home equity. Title 1 loan program is built for low-to-high cost renovation works or non-residential property construction projects & single family borrowers will get maximum of $ 25,000 as fund.
- FHA 203K Full & FHA 203K Streamline – Both are Federal insured loans designed to buy & repair/renovate a home. FHA 203K Full loan program includes major cosmetic & structure based works , where the later one (FHA 203K Streamline) includes only smaller cosmetic renovation (maximum $ 35,000). Both the loan programs can be opt for refinance & rehab (3.5% downpayment) purpose.
- EZ Conventional loan – Conventional loan program tailored to match owner/appraiser required non-structural renovation.
- Escrow for pool & weather – Both can be executed with a conventional loan to fund new swimming pools and weather related repairs. Weather escrow can also be helpful for using on VA loans if the funds are provided by the seller.
- Jumbo renovation loans – Like EZ Conventional loan it is also designed to meet requirements of owner/appraiser based renovation. Repair or improvement work must include only property based non-structural costs.
There are some distinguished renovation loan programs which are typically tailored for specific type of property. They are given below:
- Escrow for USDA repair work – It works with USDA (U.S. Department of Agriculture) aided loans & provides 100% financing with no mortgage insurance premiums. It is specially used for rural properties where appraiser wants MPR (Minimum property requirement).
- Escrow for HUD REO with repairs – Worked out as per appraiser's MPR on HUD REO listed properties.
- Fannie Mae loan programs – There are mainly two type of Fannie Mae loan programs, a) HOMESTYLE® and b) HOMEPATH®. (HomePath® & HomeStyle® are registered trademarks of Fannie Mae.)
HOMESTYLE® finances renovation work required by both owner & appraiser. It will aid the works on investment property as well as second homes. On the other hand, HOMEPATH® provides financial help to Fannie Mae foreclosed properties. Both programs will be available for structural and cosmetic renovation work which is incorporated with the house.
Repairing and renovating the home is not only a financial but also a emotional decision homeowners suppose to make. Hope the above given information will be a proper guidebook for choosing the best home renovation financing method.