Home improvement projects are among the greatest satisfactions of homeownership, but also one of the major pains: paying to redo the kitchen, adding an extra bathroom or swapping out the light fixtures quickly adds up.
Still, a healthier housing market is driving home improvement spending through the roof, according to the Joint Center for Housing Studies of Harvard University. By mid-2017, spending will grow to an 8% quarterly pace, hitting a new high of $327 billion annually.
“As more homeowners are enticed to list their properties, we can expect increased remodeling and repair in preparation for sales, coupled with spending by the new owners who are looking to customize their homes to fit their needs,” said Chris Herbert, the center’s managing director.
But navigating the convoluted home improvement lending market is exhausting. Here’s the lay of the land.
Before you borrow
- Know your costs: Get a price estimate on your renovation, broken down by cost of labor, materials, equipment rentals and permitting. Add a comfortable buffer to account for surprise expenses. If you can’t borrow enough to cover that final figure, scale back your upgrade plans.
- Figure out your timeline: Don’t take out a loan that requires 12 years to repay while funding improvements that will only last ten years before requiring repairs. The U.S. Department of Housing and Urban Development (HUD) warns homeowners to “weigh the cost of borrowing against the cost of delaying the work. If you have to borrow, you want to do it in the least expensive way.”
- Focus on function before flair: Think twice about taking out debt for projects without much utilitarian value, such as landscaping or a new pool. Focus instead on immediate needs — a heater that’s gone kaput — followed by finishing incomplete spaces. These will improve your home’s value.
- Recoup your investment: As a general rule, the simpler and lower-cost the project, the larger its cost-value ratio, according to real estate data company Hanley Wood. Remodeling efforts this year recouped an average 64.4% of their investment value when the homes were sold within a year — the second-highest return in eight years.
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How much can you get?
This is contingent on your credit score and sometimes factors such as your debt-to-income ratio and income. You probably won’t be offered much more than 90% of your home’s value, less whatever’s still owed on the mortgage.
Options for unsecured loans
Unsecured loans aren’t tied to the borrower’s collateral. This appeals to consumers who haven’t built up much home equity. And sometimes, borrowers don’t want to put their entire property on the line just to repair the roof, for example.
Look into personal loans, which tend to be installment loans with set interest rates and payback periods, allowing for easier budgeting. Depending on your credit, many of these lenders may be willing to negotiate more competitive terms. Although timelines will likely be shorter, APRs higher and borrowing limits lower than for secured loans. Loans larger than $100,000 are rare.
The Federal Housing Administration in another option. The agency insures so-called Title 1 loans made by banks and other approved lenders to fund projects that improve a home’s livability and safety. Many do-it-yourself or contractor-supervised projects fall within its purview: dishwashers built into the kitchen framework, doors widened for wheelchair access, alternative energy integration and more. You’ll have up to 20 years to pay back the loan, and the interest may be tax deductible. Title 1 loans max out at $25,000 for existing single-family structures, with different limits for mobile and multi-family homes.
Second mortgages and refinancing
- Cash-out refinance
Mortgage rates are at historic lows — 3.47% in October compared to 6.36% a decade ago — which makes refinancing an older mortgage tempting. This option replaces the original mortgage for more than what is owed and takes the difference in cash. Downsides include high closing costs, a higher APR than a standard sans-cash refinance and a reset clock on mortgage payments.
- Fannie Mae HomeStyle Renovation mortgage (HSR)
This option comes from the federally-sponsored, publicly traded Federal National Mortgage Assn., or Fannie Mae. There are no required or restricted renovations or minimum spend. As long as the improvement is permanently attached to the real property and adds value, Fannie Mae doesn’t care whether it’s a functional or cosmetic fix. Lending caps off at 95% of the home’s appraised value after the upgrades are complete. Borrowers will have to submit a down payment– at least 5% for those with excellent credit and a single-unit home.
- FHA 203(k) Rehabilitation Mortgage
This is the FHA’s version of the HSR. It’s more accepting of borrowers who can’t afford a hefty down payment or who have so-so credit — though they’ll likely face higher mortgage insurance premiums. Lenders can hand out up to 10% more than the home is worth if the post-improvement property value increases, starting from $5,000. The down payment starts at 3.5%. Learn more here.
Other financing methods
- Using credit cards
Only if your credit is good enough, your remodeling project is small enough and your expenses payable within a year and a half should you attempt this route. You may qualify for a card with a 0% introductory offer, which within the allotted time frame would essentially function as a loan without interest.
Drawbacks: Once the promotional period is up, the interest rates are likely to be high. And many contractors don’t accept credit cards, so a loan that allows you to access cash may be preferable. (Check out SuperMoney’s recommended list of credit cards here.)
- Home equity loans (HEL) and home equity lines of credit (HELOC)
An HEL is delivered as a lump sum with fixed interest rates. Most require the principal and interest to be paid back within 15 years, though terms range from 5 to 30 years. A HELOC works a bit like a credit card, with a revolving open credit line that borrowers can tap as needed, up to a point. Interest is charged only on the amount withdrawn but at rates that vary based on the market. The timeline usually requires payment after ten years.
These options are secured, so they tend to have lower interest rates than personal loans or credit cards, frequently sub-5%. Their payback terms are usually longer, so they’re better for larger or more frequent projects costing more than $50,000. Often, come tax season, related interest can be deducted.
Drawbacks: Because HELs and HELOCs attached to collateral, the application process is often complicated. And borrowers need to have enough equity. These loans are also sometimes saddled with transaction, pre-payment and closing fees.
- Green grants and loans
Want to help save the environment by adding solar panels, boosting energy efficiency or scaling back waste? Some lenders have loans dedicated to eco-centric projects. Renew Financial operates in California, Florida, New York and Pennsylvania and offers up to $250,000 in financing. And some nonprofits and government agencies reserve grant money — which doesn’t need to be paid back — for the same purpose. DSIRE has a database of state incentives searchable by zip code. The FHA even offers an Energy Efficient Mortgage.
How do I choose a lender?
You don’t need to go through your mortgage lender, though sometimes they’ll be more generous with loyal customers. If customer service is a priority, check out J.D. Power’s mortgage servicer satisfaction survey and inquire at the top performers about home improvement loans.
The ranks of online lenders are growing fast. All will consider your credit, but many will also take into account factors such as your profession and education when reviewing your application. LightStream offers its lowest rates — 4.29% with autopay — for home improvement borrowers with superb credit and substantial incomes.
And be wary of contractors offering to handling financing for you. You can usually do better evaluating options on your own rather than trusting your contractor’s network.
So, what kind of project do you plan to fund? Check out these 10 transformative home improvement ideas.