Financing a remodel is different than financing a new home build — mostly because the loan amount will be much less. For this reason, there are often more custom home remodel financing options to choose from, though what’s available to you will depend on several factors: how much you’re asking for, your financial status, the type of loan you’re seeking, and the lender you’re working with.
First Steps When Financing a Custom Home Remodel
Before speaking with your lender about financing a remodel, you should have a good idea of the scope of the project. When first meeting with a builder and contractor for the remodel, you should receive a clear estimate of the proposed work. The estimate will include the cost of labor hours as well as materials. Consider adding an extra ten percent to the proposed amount when you talk to your lender, to account for any unexpected changes or repairs that could come up during construction.
The estimate will give you a clearer idea of how much money you’ll need and the time it will take to pay off the loan. Then, you can search for lenders that offer the types of loans you’re seeking and will be likely to work with you on the best interest rate.
Asking Your Lender About Financing a Remodel
Understand that just because you ask for a certain amount, doesn’t mean the lender will give it to you. The amount they lend will depend on your credit history, your income, and the loan-to-value ratio, or. The loan-to-value ratio (LTV) is based on a percentage of your home’s estimated value. LTV can go up to 80 percent, depending on your credit and income, or it may be as low as 60-70 percent. Generally, the higher the LTV, the higher the interest rate.
Your monthly income will determine the maximum monthly payment you can afford, your total house payment should be no more than 36% of your monthly income, which includes the original mortgage you have on your home.
Custom Home Remodel Financing Options
There are many types of loans that can be used for financing a remodel. Here are a few of the most common custom home remodel financing options:
- A-Loans: Some A lenders can offer high loan amounts with low interest rates with A loans. However, you must have level A credit to be eligible for this financing option.
- Home Equity Loans: This type of loan offers the full loan up-front, after which you take 15 or 30 years to pay it off. These loans come with a fixed interest rate, so you always know how much your payment will be, but interest rates for home equity loans are often higher than average.
- Home Equity Line of Credit: This custom home remodel financing option works like a credit card. The lender issues an upper limit to how much you can borrow, and you can withdraw funds as you need them, only making payments on what you take out. The interest rate is typically adjustable.
- FHA 203(k) Mortgage: With this mortgage, you can refinance your initial mortgage and factor the remodel into a new home loan. The new loan is based on the value of your home after remodeling, so, assuming your remodeled home will have a greater value, you’ll be able to borrow a higher amount.
- Energy Efficient Mortgages (EEMs): These mortgages are available for those financing a remodel to improve their home’s energy efficiency. In order to qualify, the home and proposed remodel must meet strict efficiency requirements.
- B and C-Loans: If you don’t meet the high credit standards for an A loan, you can apply for a B or C loan. However, these will likely come with higher interest rates as the bank must assume a greater level of risk.
Know that interest rates and actual mortgage costs will vary based on your monthly payment amount and the loan term. You should first check with your lender about refinancing your current mortgage. They can also give you a better idea of what types of loans you may be eligible for when it comes time to look for financing a remodel.
Now that you understand a few of your custom home remodel refinancing options, you can get started shopping for a loan!
Planning to remodel your home, but not sure where to start? Talk to the experts at Konkol Custom Homes. We don’t just build custom homes — we also offer custom remodeling services too! We’re happy to help you navigate the custom home remodeling process.