Remodeling your home can cost you a fortune if you’re not careful. This is especially true if you purchased a house that needs renovations and remodeling. But, you can find several smart ways of financing a fixer upper and saving you a pretty penny in the process.
Financing a Fixer Upper
So, how do you finance a home remodel? What are the ways for financing a fixer upper? Here are four ways that you can finance your remodeling project without breaking the bank.
Taking Out a HELOC
One way for financing a fixer upper is to take out a home equity line of credit (HELOC). Of course, you want to be very careful and ensure that you plan to stay in your home a long while before doing so. Or, you could find yourself upside down on your mortgages if the real estate market moves against you like it did in 2008.
But, a HELOC can provide you with cash for your home remodel if you have enough equity in your home. Typically, a HELOC interest rate is more than the traditional 30 and 15-year mortgages.
Be sure to read all of the fine print regarding financing a fixer upper with a HELOC. Are there prepayment penalties? How long can you keep the line of credit open?
Refinancing Your Home
Another way to finance a home remodel or a fixer upper is simply to refinance your home. Have you been living in your home a while? Do you have a lot of repairs or upgrades that you’d like to make?
You may want to consider refinancing then as another option for paying for your remodeling project. Of course, refinancing is not for every homeowner. You need to have a considerable amount of equity in your home before you refinance.
And, like in 2008 housing crisis, you will want to keep a close eye on your home value and changes to the value. A cash out refinance can help you lock in a lower interest rate if you haven’t refinanced in a while. And, you can get cash out for financing a fixer upper.
You should also pay close attention to the terms of your new refinanced mortgage. Are you extending the loan back out to 30 years even though you’ve paid off several years of your current 30-year mortgage? Can you find a lower number of years in your new mortgage’s term, lower your interest rate, and have the same monthly payment? You may be surprised depending on how expensive your original loan is.
Take Out a Construction Loan
If you’re truly looking at financing a fixer upper, you may qualify for a construction loan. Or, maybe you have to simply start over with your home building. Construction loans are typically for brand new constructions.
If you are planning to completely renovate your home or build a new one, a construction loan may help you maximize your borrowing power. The bank lends money with a construction loan based on the appraised future value of the future home.
Banks typically lock in construction loan rates for six to 18 months. Then, you make interest-only payments on the amount paid by the bank for the loan during that time. When construction is completed, the bank switches the construction loan to a standard mortgage.
You may also be able to finance your fixer upper with a reverse mortgage. Check out this reverse mortgage calculator to see how much money you can get out of your current home.
Save and Pay In Cash
The age-old saying has never been truer. “Cash is king.”
And, cash is still king even when you’re paying for a home remodel or your money pit, fixer upper. Many contractors offer a discount for cash, and you can save money financing your fixer upper looking for a cash discount.
Credit card providers hit all companies, retailers and service providers alike, with a merchant fee. This can range from 2-4% on the transaction costs when a customer uses his or her credit card. That’s how the credit card processing companies like Visa and MasterCard earn a living.
Have you ever seen the cash versus credit card prices at gas stations while pumping gas into your car? It’s the same thing. Those gas stations are passing along the merchant fees back to you, the consumer.
Even my rental company is in on it. It costs me a processing fee to pay the rent on my apartment with a credit card every month. They are passing along those costs to the consumer.
If you are paying with cash, whether it’s for gas, rent, or construction materials, the ball is in your court. You can often score a discount from your contractor if you’re paying with cash. You may simply just need to ask for it and negotiate it up front. Be sure to at least try and ask for one.
Remodeling your home or building a new construction can cost you a lot of money. You have to be mindful of the costs, but there are several options for financing that you should consider. There are several ways for financing a fixer upper or paying for a remodel that can save you a lot of money in the process.
Have you ever had trouble financing a fixer upper? How did you go about paying for your remodeling?