Financing Options
If you need assistance in planning financing for your remodeling project, your mortgage lender can help you review some of your options. Listed below are some of the different types of lending that would be available for you to choose. Your financial advisor, banker or accountant can also help you determine what is best for you.
Fixed Rate Loans
Both interest rate and payment remain the same over the term of the loan. Loans can be amortized over the following terms: 10, 15, 20, 25, 30, and 40 years. The advantage of a fixed rate program is that it allows you to get a fixed rate, over a specified period, without being concerned about market fluctuations. This type of financing is recommended for borrowers who intend to stay in their house for a long period of time. Recently, some lenders have added an interest only feature to their fixed rate product menu.Fixed Rate Balloons
Both interest rate and payment remain the same until the loan is due. Typically, the entire loan amount is due in either 3, 5, or 7 years. The advantage of balloon programs is that they tend to have the lowest rates, due to the fact that the entire balance must be paid off or refinanced at the end of the term. This type of financing is recommended for borrowers who know they will be leaving their current house in 3, 5, or 7 years.The Renovation Loan
One of the best ways to finance that new kitchen or bath, or any addition or renovation you are planning, is to take a look at "The Renovation Loan". The Renovation Loan has been used for years and one of the main reasons to consider this type of financing is that the loan is based on the appraised value as completed. If owned less than 12 months, you are required to use the purchase price, plus the renovation cost as a base. If owned over 12 months, appraised value is used, if over cost.Close Before Construction Begins
Of the several loans available today that allow the borrower to close before construction begins, one of the most popular of these loans is the:
One-Time Close
Highlights of the One-Time Close loans are:►Renovation of existing home or new construction, primary residence or 2nd home
►Loans to $1,500,000
►Construction period up to 12 months
►ONE application - ONE closing
►Combines both remodeling loan and permanent mortgage all into one loan
►Loan is pre-approved and closed before construction
►No credit updates or re-qualifying at end of construction
►ONE set of fees - no duplication of costs and fees = saved money
►Loan is a one year ARM attached to the prime rate
►Interest only during construction on funds per draw request
►Gain tax deductions from interest paid during construction
►No escrows collected during construction
►Upon completion of construction or at one year, modify to a fixed or adjustable rate loan
►No pre-payment penalty
Two-Time Close
In today's market, the One-Time Close loan is becoming increasingly popular. However, there may be reasons you need the two-time close loans. The two-time close renovation loans are for those who want to finish with an Adjustable Rate Mortgage (rather than a fixed) or have second mortgages or Home Equity Lines of Credit that they want (and can) keep in place. Additionally, should an investor need the renovation loan, the two-time close is available for the remodeling of the investment or residential property. Some of the highlights of the two-time close are:
►Renovation of existing home or new construction, primary residence, 2nd home or investment property
►Construction period up to 12 months
►Finance up to 90% of appraised value AS RENOVATED or on cost basis
►Loan is pre-approved and closed before construction
►No pre-payment penalty
►Interest only during construction on funds per draw request
►Gain tax deductions from interest paid during construction
►No escrows collected during construction
►Upon completion of the renovation, close permanent loan into any type of program, whether it be fixed, an adjustable rate mortgage (ARM) or any loan in the market
Other Factors to Consider
The two most important items in any loan are the appraisal and credit report. Both of the above mentioned financing options require fairly good credit. One way to check your credit report AND get your credit score is to go to www.myfico.com on the internet. When you check your own report, the credit bureaus do not count the inquiry against you. Check your credit report carefully and make sure everything on it is correct.
An appraisal will be made on the property based on the completed value or after the renovation is complete. You just need to provide the appraiser with a set of plans for the renovation and the cost of the renovation or construction that you and your contractor have agreed upon. With all of the above being done, closing your renovation loan should proceed smoothly.
