The main ways to finance a home improvement project are a home equity loan or HELOC, a cash-out refinance, a personal loan, a renovation loan, or contractor financing. Home equity options usually offer the lowest rates if you have equity, while renovation and personal loans work when you don’t. Here’s how each option works and how to choose the right one for your project.
In Los Angeles and Southern California, there has been a recent increase in home renovation and remodeling. As a result of people spending more time at home, they are electing to make changes to their existing space.
Remodeling can be an excellent way to improve your space and increase its long-term value, but it can be expensive. Some homeowners choose to use cash funds to pay for a home improvement project, while others prefer to obtain a loan that meets their needs.
Here at GreatBuildz, a free service that connects homeowners with reliable general contractors in Los Angeles, Orange County, Ventura & San Diego, we get inquiries every day about home improvement financing options for their renovation projects – here are some key points you need to know.
Home Remodel Financing
Because the costs to renovate are significant, many homeowners will need to consider financing and loan options for their project. There are several options worth considering based on your specific situation, and fortunately, more and more lenders are offering home improvement loan products. Let’s explore the most common home improvement financing in Los Angeles and even a few ‘untraditional’ options:
Depending on the scope, size, and options you want, the cost of construction and renovation projects will vary widely, but you can rest assured that it will be a significant investment. The majority of renovations are extensive construction projects needing costly materials, skilled labor, and qualified general contractor supervision.
Renovation expenses in Los Angeles and Southern California might vary greatly based on the nature of the job. Check out my blog for a full breakdown of the expenses of various home improvement tasks.
A basic remodeling project, such as flooring/painting or a small bathroom remodel, could cost between $20,000 and $30,000. A medium-sized project may include a complete kitchen renovation, a garage conversion, or the renovation of many bathrooms, and will likely cost between $50,000 and $100,000. A whole-house remodel, an accessory dwelling unit addition, or a master bedroom addition are examples of larger projects that cost more than $100,000.
Due to the high cost of renovations, many homeowners may need to investigate finance and loan options for their projects. There are a lot of options to explore based on your unique circumstances, and thankfully, an increasing number of lenders provide home improvement loan solutions. Let’s examine the most prevalent home remodeling financing solutions in Los Angeles, as well as a couple ‘unconventional’ alternatives:
Home Equity Line of Credit (HELOC)
Assuming you have an existing mortgage on your house and have built up equity as home prices have risen, a home equity line of credit (HELOC) loan may be a smart option for financing your home renovation loan. With a Home Equity Line of Credit, you maintain your original mortgage, but the bank provides you with a second mortgage in the form of a credit line. The lender will likely be ready to offer you a sum based on the following formula: 80 to 90% of your home’s appraised worth minus the balance of your current mortgage.
The HELOC is a revolving credit line organized similarly to a credit card: you can withdraw as much or as little of the loan as you’d like, pay it back whenever you’d like, and only pay interest on the amount you’ve withdrawn. Typically, obtaining a HELOC loan is quick and inexpensive, with little closing costs. However, this loan may have a higher interest rate than other loans and a variable interest rate that may increase over time; therefore, you should assess your alternatives. Also, the period of this loan might range from 10 to 30 years, either interest-only or fully amortized, depending on the lender.
With interest rates rising, A HELOC or a Home Equity Loan (HELOAN) has become even more attractive. You aren’t likely to want to refinance your entire mortgage if you currently have a low-interest rate. These products let you keep your low rate and tack on a smaller ‘second mortgage’, albeit with a higher rate.
Here are a few lenders in California that are able to provide a HELOC loan for your home improvement project:
Home Equity Loan
A Home Equity Loan is an excellent alternative for funding home improvements and is frequently referred to as a second mortgage. It is comparable to a home equity line of credit in that the homeowner uses the equity in their home in excess of what is outstanding on their first mortgage. The difference with a Home Equity Loan is that you receive the total loan amount in one lump sum. The negative to this is having to pay interest on the whole amount of the loan (unlike the HELOC). The advantage is that the interest rate can be fixed as opposed to variable.
Home Equity Loans will always carry a higher interest rate than your primary mortgage and have a payback period of 5 to 15 years. Also, this loan would often involve a similar underwriting process to a conventional mortgage, including an appraisal, credit checks, etc., and the amount of financing you qualify for will be based on the amount of equity you have in your house, much like a home equity line of credit.
A few lenders to consider for a HELOAN for a home improvement project are:
Cash-Out Refinance
The cash-out refinance is another excellent loan choice for renovation. A cash-out refinance replaces the original mortgage on your home with a new larger loan and converts a portion of the home’s equity into cash that may be used for construction. The process is quite similar to a conventional mortgage refinance, but rather than refinancing for the exact amount of your present mortgage, you would refinance for a greater amount that will both pay off your existing loan and provide you with additional funds for upgrades or construction.
As with the other types of home renovation financing outlined previously, a cash-out refinance requires that you have equity in your property. Consequently, the maximum amount of your refinance will often not exceed 80% of the appraised value of your home.
A cash-out refinance is regarded as one of the best financing choices for renovations for various reasons. Because it resembles a conventional refinance so closely, you are likely to obtain the best possible interest rate. If your current mortgage interest rate is higher than current rates, this loan represents an opportunity to cut it. A refinance comes with a standard loan term of 30 years (with other possible options such as 15 or 20 years), so it’s likely that your monthly payment will be affordable.
Additional considerations for this home improvement loan option: With a refinance, you should expect to pay expenses such as appraisal, title, closing costs, etc. In addition, you will be subject to a full ‘underwriting’ process in which the lender checks your credit, taxes, income, etc.
Below are a few lenders who offer a cash out refinance program for home improvements:
Renovation Loan
Obtaining a renovation loan is an alternative method of financing your remodeling or building project. These loans are unsecured personal loans that do not require collateral. They are quicker and simpler to obtain than conventional loans and are based on your income qualifications rather than your property’s value or equity. Typically, the loan amount is limited to approximately $100,000.
In addition, because the loan is not secured by the property, the interest rate will be greater and the repayment time will be shorter. This type of home improvement loan is ideal for people seeking speed and ease. Sofi and Lightstream (links) are two lenders that provide this type of service, but you may also ask your local bank or lender if they have comparable possibilities.
Renovation Loan lenders in California:
Construction Loan
A construction loan is another option for larger construction projects such as an ADU or garage conversion. This loan is somewhat more involved than the conventional products listed above and will take greater effort.
A lender will offer you a construction loan in the amount of 80 to 95% of your ADU’s “finished value.” The valuation of your completed project will be determined by the lender’s own underwriter, and the loan amount will be determined accordingly. This is often a short-term (about one year) loan with a somewhat higher interest rate than a traditional loan.
To qualify for this form of loan, you will need to provide the lender with documents such as your finished plans, schedule, and budget, all of which are developed by an architect and a licensed general contractor. Typically, the lender will not fund the loan unless you obtain a valid building permit. Once the loan is confirmed and funded, the lender will only transfer the funds to the contractor in increments (called “draws”) based on their progress, which will be visually checked by a bank inspector.
Due to the additional effort required by the lender, you should expect this form of construction finance to take longer to process and cost more in various lender and closing fees.
During the length of this loan, you will likely only make monthly payments of interest on the outstanding balance. At the conclusion of the one-year construction loan period, this loan should automatically convert into a 30-year permanent loan with a variable or fixed interest rate.
FHA & Fannie Mae Loans
FHA and Fannie Mae offer remodeling loans with distinctive features. FHA’s loan program is known as the 203k loan, whereas Fannie Mae’s is known as the HomeStyle loan. If one of these programs fits your circumstances, it may take some time to find the right lender, as not every lender offers them. The 203k loan is accessible exclusively for primary residences.
The 203k and Homestyle loans are unique in that they allow you to finance both the purchase of a property and the cost of renovations with a single loan. This could be a suitable alternative for someone who expects to purchase a home and immediately begin renovations or construction.
Because these loans are backed by government organizations (FHA or Fannie Mae), the loan amounts might be substantial. In particular, they may allow you to borrow up to 97% of the home’s worth and up to 75% of the ‘extra’ value resulting from the improvements. However, there are loan limits based on your location, so be sure to verify these limits.
These loans are most similar to the Construction Loans described above. There will likely be a slightly higher-than-average interest rate and additional closing costs compared to a traditional loan. In addition, the lender will need details regarding your chosen contractor, architectural drawings, budget, etc.
Generally, you must begin the project within 30 days of closing, beginning with the submission of plans and obtaining a building permit. The standard completion period for these loans is six months, but extensions are granted in the event of delays. Your new loan’s monthly payments will begin immediately. However, if you are unable to reside in your home during the renovation, you can finance a few months of payments into the mortgage to postpone the start of payments. The procedure for paying the contractor is identical to that of a construction loan.
Less Traditional Forms of Financing
Family and Friends Loan: If you have close relationships with people who are prepared to lend you some or all of the money for the renovation, this could be a possibility. If you intend to rent the home you’re renovating, you could agree to make monthly loan payments from your rental income. In addition, you and your lender have complete discretion over the loan’s term, interest rate, and repayment plan, etc.
Credit cards and personal loans should be handled with caution because they carry high interest rates and have the potential to harm your credit score if not repaid punctually. This may be an excellent option if you need temporary funds to start or complete a project and plan to repay the loan within a reasonable amount of time.
Retirement Accounts: If you are of the age to receive distributions from your retirement account, you should assess whether receiving a lump sum amount is a suitable alternative. Consult with a CPA or tax professional to determine any tax liability. You could also consider borrowing from your retirement savings. Some retirement plans permit you to borrow up to 50 percent of the total account balance, subject to certain maximums. You will need to repay the loan to avoid tax penalties, so you should determine how you will do so in advance.
With so many forms of home improvement financing accessible, the majority of individuals will find a suitable program.
Interested in other remodeling topics? Check out our other articles on renovation costs, kitchen remodels, bathroom remodels, ADU projects, or how to find a great contractor.
Frequently Asked Questions About Home Improvement Financing
What are the best ways to finance a home renovation?
The most common options are a home equity loan or HELOC, a cash-out refinance, a personal loan, a renovation loan, and contractor financing. If you have equity in your home, home equity products usually offer the lowest interest rates. If you don’t, a renovation loan or personal loan can fund the work based on your income and credit.
What is the difference between a home equity loan and a HELOC?
A home equity loan gives you a lump sum at a fixed rate, which is good for a one-time project with a known cost. A HELOC is a revolving line of credit you draw from as needed, usually at a variable rate, which suits projects with costs that come in stages.
Can I finance a renovation with no equity?
Yes. A renovation loan, such as an FHA 203(k) or a Fannie Mae HomeStyle loan, lets you borrow against the projected value of your home after the work is done. Personal loans and contractor financing are also options, though they often carry higher interest rates.
When it comes to planning and financing a remodel for your home, you shouldn’t have to go it alone – Greatbuildz can help simplify your renovation experience. GreatBuildz is a free service that connects homeowners with reliable, thoroughly screened general contractors in Los Angeles, Orange County, Ventura & San Diego and provides project support from start to finish.
Call now (818.317.3567) to chat with a real person about financing your renovation project or visit our website for more information: www.greatbuildz.com
