Monday, July 22, 2024

Understanding Your Financial Options When Planning a Major Renovation

Financial Options


Dreaming of an open-concept kitchen? Or maybe adding that luxury master suite? Home renovations transform living spaces, but the price tag can be steep. Proper planning prevents sticker shock later.

Taking Out a Loan

Unless you have stashed away a fortune, you will likely need to borrow funds to cover major renovation costs. Some loan routes to consider:

Home Equity Loan

According to the experts at Mortgage Maestro based out of Colorado, home loans let you borrow against your home’s equity (its current value minus remaining mortgage balance). You will receive a lump sum paid back over 5-30 years at a fixed interest rate.

Home Equity Line of Credit (HELOC)

A HELOC works like a credit card, letting you draw funds as needed from your home equity. It has variable interest rates and repayment periods of 10-20 years.

Cash-Out Refinance

This replaces your current mortgage with a new, larger home loan that pays off your old loan while giving you cash for renovations.

Construction Loans

For major jobs like additions or total remodels, construction loans provide funds you tap into as work progresses. Interest rates are higher, but you only pay on money actually borrowed.

Exploring Government Programs

Certain projects like energy efficiency upgrades or increasing accessibility may qualify you for government-backed renovation loans:

FHA 203(k) Loan

This program wraps renovation costs into one FHA-insured mortgage, which can include a low 3.5% down payment option.

Title 1 Loan

Insured by the federal government, Title 1 loans allow homeowners to borrow up to $25,000 for safe housing renovations or energy-saving projects.

USDA 504 Loan and Grant Programs

Low-income rural homeowners may qualify for loans and grants from the U.S. Department of Agriculture towards the removal of health/safety hazards.

Don’t Deplete Savings

While tempting, avoid draining your entire life savings to fund renovations. Leave a cushion for unexpected costs that almost always pop up during construction.

You should also set aside at least 3-6 months’ worth of mortgage payments as a renovation safety net. Unforeseen delays or hiccups can really eat into your liquid cash.

Understanding Equity and Collateral

Any loan using your home as collateral, like a HELOC, refinance, or home equity loan, requires sufficient home equity for lenders to feel secure about lending more money.

Ideally, you want at least 20% equity for renovations to increase your loan chances. Projects expected to significantly raise the home’s value also appeal to lenders.

Lenders may require a home appraisal or inspection before approving loans against your equity. This verifies your home’s current market value since that determines your equity stake.

Planning Phase Advice

First, work with a contractor to nail down true renovation pricing, including materials, labor, permitting fees, etc. Aim high with a cushion for surprise costs.

Once you have firm quotes, meet with multiple lenders to compare rates, fees, and your loan qualification chances. Sharing remodeling plans helps them to assess if it’s a valuable home investment.

A mortgage broker can simplify this step by doing the lender shopping for you to find your best options. Discuss your capability for taking on new loan payments too.

Cash Flow Considerations

Finally, map out timing so you don’t max out liquidity midway through construction. Having loan funds disbursed in stages over the renovation timeline prevents that risk.

Keeping living expenses lean while work is underway also helps. Cook at home, avoid new debt, and schedule renovations during temperate weather to minimize utility bill spikes.


Undertaking a major renovation has its stresses, but putting in the upfront work to understand the costs and map out a financial strategy pays major dividends. An investment in your forever home is an investment worth making – if you have the right plan in place.

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