Embarking on a home renovation project is an exciting endeavor, but one of the most important aspects of turning your vision into reality is securing the right financing. Whether you're planning a small remodeling project or a major overhaul, navigating the world of home renovation financing can be daunting. Financing is a vital piece of the puzzle in preparing for your home renovation. When it comes to loans and who to work with there are several options.

financing with equity

Borrowing against home equity typically involves either taking out a second mortgage or refinancing your existing mortgage to access the funds needed for a home remodeling project. Given the rise in DC home prices over time, many homeowners have a good share of equity in their home after 7 years which is generally when homeowners are ready to remodel some aspect of their home. This option often offers the benefit of lower interest rates, and the interest paid on home equity loans or lines of credit is tax-deductible when used for home improvements.

When opting for equity financing, it's important to note that the lender typically requires a home appraisal to determine the property's current market value. Additionally, borrowers may need to cover closing costs associated with the loan.

Home equity line of credit

A HELOC is a credit line that allows you to borrow funds as needed with minimum payments required only for the amount you borrow. The maximum HELOC amount can be up to 85% of your home's value minus your outstanding mortgage balance. The interest rates are usually variable, meaning your monthly payments can fluctuate based on changes in the interest rate. Typically, you have 10 years to utilize the funds from a HELOC and an additional 20 years to repay the remaining balance.

home equity loan

Similar to a HELOC, a home equity loan enables you to borrow up to roughly 90% of your home’s value, minus your existing mortgage balance. The distinguishing factor is that you'll receive the entire amount in a single payment and repay it over a period that is typically 30 years or less. These loans come with fixed interest rates and monthly repayment obligations. 

Cash out refinance

Cash-out refinancing replaces your existing mortgage with a larger one, and you receive the difference in cash to fund your renovation. This option is best if you need a large loan for a long-term home renovation, ideally with a lower interest rate than your current mortgage.

financing without equity

cash

Cash can be used to finance home renovations, which avoids the burden of interest payments and ensures a debt-free completion of the project. Making improvements to your home generally increases the value of the home. The Cost vs. Value report collects data on the cost of improvements and the value created from those improvements. Usually, the value created is about 75% of the investment. In the Washington DC area there is almost always a 100% ROI over the 7 years following a renovation.

Regularly allocating a portion of your monthly income for savings can gradually accumulate funds for upcoming home improvement projects and essential repairs. Spreading out the expenses over the renovation duration can assist in aligning the project with your budget. Cash financing makes sense when it does not hinder your other financial objectives or surpass your monthly budget limits.

personal loans

Unsecured personal loans provide a quick way for homeowners to finance projects, as most lenders can fund these loans within a week. This is in contrast to home equity financing, which involves time-consuming underwriting and appraisal processes.  

At PACE, our goal is to improve the lives of our clients by enhancing the experience of living in D.C’s dynamic and thriving urban neighborhoods with quality and easy-to-manage renovations. Check out our resources to learn more and connect with the right contacts. Reach out today!

Here's to a successful and stress-free renovation journey!