I never expected to fall in love with a fixer-upper, but it happened. And in order to turn that farmhouse into my dream home, I had to find out everything I could about home-renovation loans.
Home-renovation loans can be wrapped into your mortgage loan and cover the cost of repairs on a property, such as upgrades to heating and cooling and even a new bathroom or kitchen.
Home-renovation loans can help you build equity fast, since you’re more in control of the value of your home, but only if you know what you’re doing.
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I was not expecting to walk into a 1920s farmhouse with broken windows, lead paint, and a bird’s nest in the attic and say, “I love it.”
Yet last month, while on an open-house tour of an up-and-coming historical Baltimore neighborhood, I did just that. But before I can even think about buying the property, I’ll need to learn about getting a home-renovation loan.
What is a home-renovation loan?
A home-renovation loan is a type of loan, often wrapped into a mortgage loan, that includes the costs of renovating a “fixer-upper.”
You might consider getting one if you’re interested in buying a home at a lower price point and taking on the costs of fixing it up. Buyers choose to do this for a number of reasons, including personal pleasure or as a way to gain equity faster than they normally would when buying a move-in ready house, since you’re more in control of establishing the value of your house.
Home-renovation loans may cover costs such as installing or updating heating and cooling systems, energy improvements, roofing, waterproofing, mold remediation, etc., in addition to desired renovations like a new kitchen or bathroom that could add value to the house.
In many cases, an appraisal for a home-renovation loan will include up to 110% of the home’s after-improved value. This is particularly helpful if the home is in need of deferred maintenance, such as a hot water heater with one to two years of life left in it.
You can build your dream home, but there’s some risk involved
For one thing, home-renovation loans can be a bit more costly than standard home loans. Buyers sometimes combat this by buying down the permanent rate, which means paying for interest up front to reduce their future monthly payments. Another way of combating the price of a reno loan is to refinance after six months.
Douglas Boneparth, a certified financial planner at Bone Fide Wealth, says that the potential to earn equity through a home-renovation loan is doable — but not without thoughtful preparation. He advises first-time homebuyers to be very wary of the promise of “fast equity” and make sure they understand all the costs involved before moving forward with a fixer-upper.
“The likelihood that a new homebuyer will successfully maximize equity on their first try using a home-renovation loan is rather low,” says Boneparth, explaining that getting good at building wealth through real estate takes experience.
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Source:: Business Insider