For many individuals, adding a pool, an addition to the home or making repairs, requires the use of a mortgage. There are many ways that you can use your home to finance construction projects and home renovations. Obtaining a mortgage loan to finance your construction project or home renovation is often the most affordable route offering the most flexible financing options.
If you are thinking about seeking a construction loan, home renovation loan or mortgage, here are variables that you should consider:
1. Depending on the required loan amount, a home-equity line of credit (HELOC) may be the most cost-effective option. Home equity lines of credit; typically carry lower interest rates when the loan is less than 75% of the home value. A fixed rate loan program is available at higher interest rates and is available to 90% of the home’s value. For this reason, home equity lines of credit and some fixed rate second mortgage financing work best for smaller loan amounts that will be paid off in a reasonably short period of time.
2. Borrowers who need larger loan amounts and who intend to keep the outstanding balance for a longer period of time may want to consider refinancing their first mortgage, paying off the existing balance and increasing the loan in an amount sufficient to pay for the improvements. While this option will most likely require the borrower to pay closing costs, the benefit of this option is usually a lower interest rate over an extended period of time than is typically offered by other Home Improvement loans.
3. Construction or Construction/Permanent loans are best suited for extensive renovations requiring multiple draws to contractors or labourers. Draws are usually set up monthly and are subject to at least a 10% holdback of funds in accordance with “construction liens” laws. In addition, many lenders prefer to fund these draws on a cost-to-complete formula where the funding program insures that there is always enough money remaining after each draw to complete the project in the event of a problem or default. Each time the contractor requires a draw an architect, engineer or appraiser is called in to determine the value of the work in place and the remaining work to be completed. The lender will use this information to determine the amount of the draw that will be advanced. These loans are usually set at a float rate of 1 to 3 above bank prime for non-private funding and may contain a permanent (take-out) mortgage which comes into effect once the construction is complete and beyond the 45 day construction liens period.
In many instances, the lender will require plans and specification for improvements. Lenders will also require an appraisal of the subject property reflecting the value of the improvements in the new valuation.
There are so many lenders out there that include banks, finance companies, mortgage investment corporations and private lenders. Depending on your credit standing and the equity in your property, if you are planning a construction project or a home renovation, you likely have many financing options.