Giving your home a makeover is like moving into brand-spankin’ new digs altogether. A giant kitchen island, a great room addition with vaulted ceilings, an actual en suite bathroom—images of the improvements are probably dancing in your head. But a big reno costs major bucks, and you may need to take out a loan to make your dreams a reality.
Figuring out the best ways to borrow money can feel daunting, which is why we turned to the pros for advice. Whether you’re going for a complete overhaul or a single new room, here’s how to execute your best-laid plans with ease.
Learn reno prices in your area
The cost of common renovations can vary dramatically, depending on where you live and the pros you use. But even so, there are still certain variables that remain constant.
“The size of the home and the home value in your neighborhood will typically dictate the general price of the renovation,” says Erin Stetzer, owner and president of Stetzer Builders. “While you don’t want to go into a home renovation only looking at its future ability to sell, it is an important factor.”
Typically, the most expensive rooms to renovate are kitchens and bathrooms. “A good rule of thumb is to count the components present in the room you want to renovate: plumbing for the sink, bath, and toilet or electrical for outlets, lights, fan, etc. Then determine the number of tradespeople it will take to craft each of those components. The more components and tradespeople, the more expensive the room,” Stetzer says.
A general guide for estimating how much typical renovation projects cost in your area, plus the average return on investment (ROI), take a look at the 2021 Cost Versus Value report, which is broken down by region. For example, the national average for a minor kitchen remodel is around $26,000 and yields about a 72 percent ROI, whereas something as simple as replacing a garage door may cost you less than $4,000 and yield nearly a 94 percent ROI.
Know your loan options
A renovation perm loan is when the homeowner borrows against the value of the property. “We’ll refinance any existing mortgage on the property and wrap it all into one loan,” says Ian B. MacDonald, vice president and mortgage loan officer for Regions Bank.
“What’s nice about [a renovation perm loan] is that we use today’s rate market for the loan (so it’s not subject to increase based on interest rates), and the borrower pays interest-only during the construction/renovation phase on what’s drawn out,” says MacDonald. One thing to note is the rate may be higher or lower than your current mortgage. “When the work is complete, they convert it to a fully amortizing loan,” adds MacDonald. An amortized loan has scheduled, periodic payments that are applied to both the loan’s principal amount and the interest accrued.
Refinancing your mortgage is another way to secure the funds for your home overhaul. If you refinance your mortgage for a lower interest rate, you’ll lower your mortgage payments each month, which means you’ll have more liquid cash. A cash-out refinance, is essentially refinancing your mortgage for more than your previous mortgage balance, and the difference is paid to you in cash.
Then there are home equity lines of credit (HELOC) and home equity loans (HELOAN). A HELOC is a line of credit that uses your home as collateral whereas a home equity loan is a second loan taken out on your property’s equity.
“There are advantages to all the options, and it really comes down to the borrower’s wants, needs, and particular situation,” MacDonald says.
Understand your requirements
“Lenders typically request architectural plans and engineering plans as well as a budget and builder contract,” Stetzer says. They also require a specification book, which lists each component that’s going into the house—steel windows versus aluminum windows, the appliances, plumbing fixtures, etc. “The architect and designer will build this book out, and the builder will use it in their estimating process. Having the book helps the lender understand where the budget is going,” she says.
Lenders will also make sure you are qualified for a loan by looking at your work history/income, credit, assets, and property ownership, and evaluate the collateral for the loan.
“Just like qualifying for the purchase of a home, we want to make sure the borrower has the ability to repay it,” says MacDonald. Regions Bank then bases the amount it lends off the improved value of the property or the total package price (this is the home if it’s less than 12 months old) plus the cost of the remodel for a renovation perm loan.
Get an estimate
Knowing what to expect in terms of a financial commitment is crucial to begin the process, so it’s important to be clear about what you want. “The builder’s job is to translate the information the homeowner gives about what they want and what they envision the finished product to be into an actual number,” Stetzer says.
Also, consider what might go wrong. It’s better to overestimate what the cost will be by allowing for unforeseen charges in the budget. This way, you won’t have any unexpected costs and may even come in under budget if all goes according to plan, Stetzer said.
How to Make That Major Home Remodel Affordable by Jenny Tzeses | House Beautiful