Financing a Fixer Upper: How Home Renovation Loans Can Help
A fixer-upper house can be a great investment whether you are looking to transform the house for your long-term home or flip it for a profit. One of the biggest challenges involved with such a project is financing. Renovations tend to be expensive, and it can also be tricky to estimate how much the value of the house will change at the end of the project. In this post, we will talk about how home renovation loans can help you manage the cost of these projects. We’ll also talk about the role of the contractor in making these projects succeed.
How it Works
Home renovation loans are available to homeowners, and their value is based on the value of the house itself. The important wrinkle is that the home value comes from an estimate of what the fixer-upper will be worth once all the renovations are done, not the value at the beginning of the project.
Applying for a home renovation loan is similar to applying for a mortgage. The rate will depend on the project, the house, and the economic conditions at the time that you apply.
These kinds of loans will help you spread out the cost of the project. They work well on foreclosed properties or houses that have good fundamentals but need updates in the kitchen or bathroom. Generally, home renovation loans finance improvements that are meant to add a significant amount of value to the home.
Advantages of Home Renovation Loans
Home renovation loans give you the ability to undertake medium or large projects without needing to tie up some of your own savings. They are lower in size than mortgages, so they will have less impact on your credit and are appropriately matched to the cost of the renovation project. The bar for applying for them is also lower because of that smaller size.
If you are a good buyer, you can purchase a house at a good price and then improve its value via renovation. Then you have the option to sell it for greater than its original price plus the cost of renovation if everything goes well. You can also simply keep and enjoy the post-improvement home. In that case, you will still have greater net worth as a result of the higher value of the house.
Equity Possibilities
A good combination of renovation and loan can actually wind up with additional equity by the end. The most important element in contributing to this is finding the right contractor. The contractor has the ability to lower the cost and improve the value of the project. Both of those will boost the rate of return on your investment.
Keep in mind that the value of the home renovation loan is based on an estimate of the project’s contribution to the home’s value. If the project manages to come in under budget or adds more value than the estimate predicted, then you can come out ahead in terms of equity.
This kind of equity benefit is not possible with mortgages, so that is another reason to prefer a home renovation loan over a mortgage to fund these projects. This is not necessarily possible on every project, but with the right combination of contractor and project you can make it happen.
Outcomes of Renovation
A successful renovation project can take many forms. Something focused on one room can cause a transformative effect on that area, which can lift the impression of the whole house. Other projects might be spread out over a few rooms. It’s generally a good idea to use these projects to build a theme of some kind, even something as simple as a set of colors.
A home loan renovation can help you defray any associated costs with a renovation project. For example, some renovations might require you to spend some time in a hotel because the project temporarily affects the livability of the house, and you can use the loan balance to pay for that. This is important because there is some variation in how these projects play out. You might not be able to perfectly predict how much you will need to live outside the house. Loan financing gives you the flexibility to deal with that.
The contractor that you use to carry out your project can advise you about the right timeline for the project to minimize costs. That is part of what makes a good contractor so valuable: they can design the project to make the most efficienct use of your time. The costs of a renovation project include the materials and labor, but also time. The longer the project takes, the more expensive it is and the longer it will be until it starts to improve the value of the house.
Final Words
If you are even considering a renovation project, then you need to know about home renovation loans and how they can help you. They play a key role in making these projects possible. If you are planning to flip or rent the house, they are invaluable at making the project worthwhile. If you are planning to live in the house, they can bring otherwise impossible projects into reach.
Should you consider a home renovation loan for a future project, then you should get in touch with us at KNS Remodeling. We have extensive experience making loan-financed projects work for both homeowners and real estate investors.