I have handled a multitude of borrowers who have come to me with renovation projects in recent years. It often makes more sense to renovate the existing home than it does to sell the home in this market and try and get into another place that better suits certain needs. One friend came to me for what he initially described as a pretty intense renovation and add-on to the home he and his wife had owned for over 20 years. His family had grown to 4 and it was time for separate bedrooms and a playroom for the boys, an office for dad, and other neat things for the head of the household.
The project was going to end up taking down some walls and adding on over 1,000 square feet to the overall layout of the home. Well, when he came to me for the money to begin the renovation, the project had morphed into not a single wall was to stay and with the sole exception of the existing foundation, it would be a brand new home. This story itself is worthy of it's own article, but not here or now. I do want to briefly touch on how the financing for renovating your home is best accomplished.
The most common method for obtaining funds to renovate your home (one that you already own) will actually involve two different types of loans. The first will be a short-term loan that is used to fund the construction, and the second is the permanent financing when all construction is complete. The first step is to have your plans and specs all drawn up and finalized per your end result. You will need to have a complete and detailed breakdown of all costs associated with completing this project. An appraisal based on the plans and specs, basically the finished/renovated project, will be done for the lender. This tells the lender what the value of the home will be once all the work has been completed. The lender will then run its numbers based upon that new future value and calculate what the dollars able to be lent to you will be. Once all the numbers have been agreed upon and your file has been credit approved, you will then begin the process of renovating your place.
Today you need to expect to have your construction loan pay off your current first mortgage and include that amount in both the new loans you will be dealing with for this project. Additionally, most lenders will require you to put your monetary investment, if there is any required, into the project first. After your investment is in, the short-term loan begins to fund. This short-term loan is most often set up as some sort of interest only, floating HELOC type loan. The benefit here is you will not incur any interest expense for the amount of funds you haven't drawn at any given time. You will most likely be looking at needing some inspections during the construction for verification of completion of various stages. These are done in order to have additional funds released to you or the builder. This process is followed until completion of the whole project.
Fast forward to completion and you have obtained your certificate of occupancy. The lender will now want to turn the short-term construction loan into a permanent mortgage. The lender will be sure the property was completed exactly how the appraisal said it was to be completed thus giving them confirmation of the value. Your old first mortgage and the additional funds used for construction are now all rolled into one loan that you will place in some sort of longer term financing. There are a couple of drawbacks to this whole setup. The first is you will end up having some duplicate expenses with respect to closing costs for both your short-term loan and your permanent loan. There are certainly ways in which you can save some money, but there will be some duplication of costs. The other main drawback to this setup is locking in your rate on your permanent mortgage cannot be done until you are within a certain time frame of your completed project. This will vary depending on your lender, but most lenders will allow you to lock in for up to 60 days in today's world. So, if your renovation will take 4 months or so, you will have to wait to lock your permanent mortgage rate in and you will be at the mercy of whatever the rates do until you can lock in. Compare these two things to your new home and I think you will still easily find that you are doing the right thing.
This process can be confusing and I am more than willing to speak to you about a specific scenario you may have, so just email me. Hope this helps and you find this to be one more way to Empower you to Manage your Mortgage.
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