April 14, 2024

Can You Add Renovation Expenses To Your Home Loan Mortgage?

There is a question Can You Add Renovation Expenses To Your Home Loan Mortgage? Whether it is a new home or your existing home, the need to renovate or upgrade will always arise. They can be in the form of remodeling your kitchen, patio bathroom, or routine renovation.

All renovation and upgrade projects have one thing in common; they can be pretty expensive, meaning you will need to think through your options for financing. If you wonder if you could add renovation expenses to your mortgage, the simple answer is yes.

But a simple answer is probably not what you are looking for. This guide provides everything you need to know about using a mortgage to finance your renovation or upgrade projects, so keep reading to learn more.

Why Add Renovation Expenses on Your Mortgage?

Property Management

Simplified Loan Servicing

You must borrow funds from out-of-pocket cash unless you plan to finance your renovation project.

If you do not want to add renovation expenses to your mortgage but instead take another loan, you would have two loans to service, which can be inconvenient. Adding the expenses to your existing mortgage means you only make one monthly payment, simplifying repayment.

Lower Interest Rates

Interest rates for home loan mortgages are relatively lower than interest rates for others. The main reason behind the difference in interest rates is that lenders consider mortgages less risky because the property is the loan’s security.

The average interest rate for a 30-year mortgage is 4.92%, while that of a personal loan is over 10%. You can do the math.

Easy Payments

Including your expenses in your mortgage means that the installments are spread over a long period. For example, if you take a 30-year mortgage, the renovation expenses will be spread over the 30 years, and you may not feel much difference in your monthly payments.

On the other hand, personal loans have relatively short repayment periods, which means large installments.

Available Options

Why a Mortgage Might Be the Best Choice for Your Financial Goals

Refinancing Cash-Out Option

If you have acquired substantial equity in your home, you can explore the refinancing cash-out option.  Equity is basically there a percentage of ownership you have on your home based on how far you are at paying your mortgage.

For example, if you have paid 50% of the mortgage, you will have 50% equity. Cash-out refinancing is a mortgage borrowing option which allows you to take a loan against your home equity. This option allows you to use the money you buy for your purpose, including home renovation.

FHA 203(k) Loans

You probably know of FHA 203(k) loans concerning buying a home. You may not know that you can use the same for renovation expenses when buying a new home.

For example, if you are buying a relatively run-down home at a specific amount that can be worth much more after renovations, the lender will rely on the appraiser’s after-renovation valuation to determine whether to add renovation expenses to the mortgage.

However, it is important to note that this loan is only applied to primary homes and minor renovations. Most lenders have a $35,000 cap on renovation expenses allowable under FHA 203(k) loans.

Fannie Mae HomeStyle Option

Fannie Mae (Federal National Mortgage Association) extends home styling loans to qualifying candidates at a fixed or adjustable rate. The eligibility criteria for this finance option include being a US citizen or permanent resident, having a credit score of 620 or above, not more than 50% income debt ratio, and having a 3% down payment.

Available funds for this option are capped at 75% of the cost of buying the home plus the renovation cost.

Other Options to Consider

There are also other options you may want to explore for home renovations. These options include renovation mortgages, building loans, and Freddie Mac renovation mortgages.

Before picking a financing option, it is important to consider the pros and cons of each to ensure you get the best deal.

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