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Your Bank > Education and Advice > CNB University

Home Remodeling and Home Improvement Financing

C Spaker
Christopher R. Spaker, AMP is President, CNB Mortgage Company and can be reached at CSpaker@CNBank.com or 585-385-2370 x50955.

As housing prices continue to see respectable gains in some areas of the country, many homeowners are building a decent amount of equity by staying put. As home prices in your neighborhood rise, the value of your own property generally rises as well, so you have a larger amount of equity to tap. There are many financing options available to homeowners looking to remodel or make improvements to their home. One financing option is a personal loan. Personal loans are loans from a bank, credit union, or other financial institution that do not require a lien on the home, therefore they are unsecured. Because there is no lien on the home, interest rates are usually higher and personal loans are generally for small amounts. They are not the best option for homeowners who plan to embark on major renovation projects, such as adding on to the property.

There are many mortgage-related financing options available. Those options include cash-out refinances, home equity loans and home equity lines of credit, commonly referred to as HELOC’s. A cash-out refinance allows borrowers to use the equity they have built in their home to free up liquid assets. With a cash-out refinance, homeowners refinance an existing mortgage with a higher borrowed amount. This results in a single loan and loan payments that can be stretched over a long term. A home equity loan is a second mortgage or lien placed on the home in exchange for cash to the borrower. A HELOC is also a second mortgage put on the home; however it differs from a home equity loan in that the loan is a lump sum, whereas the HELOC is an open ended line of credit similar to a credit card, where interest is only paid on the amount borrowed. In general, a HELOC has more flexible spending and repayment options.

The two main benefits to home equity debt are the low cost and convenience. Closing costs are a fraction of a traditional mortgage and in many cases, the lender absorbs the closing costs provided you agree to keep the loan for at least three years. A line of credit also can be an excellent financing tool for remodeling projects that progress in stages. By borrowing just $8,000 of your $25,000 line of credit to finish one stage of your remodeling project, your monthly payments would be much lower than if you borrowed the entire $25,000 through a home equity loan.

If you're already equity-strapped, you may be able get a loan based not on how much your home is worth now, but on what it will be worth after the remodeling project is done. For years, lenders have made property-improvement loans through the Department of Housing and Urban Development's Section 203(k), a government program that insures consumer loans to finance remodeling or renovation projects.

With a 203(k) loan, lenders hire an appraiser to estimate both the as-is value of the property, and the value after the project is completed. The lender then calculates two figures, the value of the property as-is, including the cost of the remodeling and up to six months of current mortgage payments. Next, the lender adds up the value of the property after the remodeling and tacks on 10%. The amount of the loan is the lesser of these two figures. You can borrow up to the FHA maximum loan limit which varies by county. In Monroe and Ontario Counties for example, the maximum loan limit for a single family home is $201,400.

As an alternative, Fannie Mae offers similar loans through its Home-style Renovation and Home-style Remodeling mortgage programs. These products are a combination of a mortgage and a construction loan. Borrowers must hire licensed contractors and submit detailed work plans for approval by the lender. The lender is involved throughout the entire remodeling process and from day one, the borrower begins making payments on the loan. As the work is completed by the contractor, the lender is responsible for inspecting the work and paying the contractor.

Fannie Mae Home-style loans cannot exceed 110% of the value of the property post-renovation and you can borrow up to the conforming loan limit of $417,000. Most mortgage bankers are familiar with these programs and you should call one to obtain more detailed information.