By Emma Castleberry
When it comes to finding the right home loan, there is no shortage of choices, and making the right decision can seem overwhelming. Some types of loans are better than others – especially when it comes to a specific project like a home remodel.
Barry Durhman is a mortgage loan originator with Guardian Mortgage, a division of Sunflower Bank. We sat down with Durhman, a true expert in home loans, to get his advice on the best loans for your next home renovation project. Here are his tips:
DECIDE ON A LUMP SUM OF CASH OR INCREMENTAL PAYMENTS
If you are looking to renovate your home, Durhman says the first thing to ask yourself is this: Do I need all the cash upfront or in increments? This primary factor will dictate what loan options are available to you.
CHOOSE BETWEEN REFINANCING AND LIQUIDATION
Once you know how you need the money – lump sum or incremental – you can decide whether you want to refinance your first mortgage or liquidate the equity in a “cash-out” refinance. “The good news is that financing the renovation costs into your primary mortgage makes the interest paid tax deductible,” says Durhman.
Durhman adds that some homeowners can look into a second position mortgage, where you will receive all the funds upfront or in a Home Equity Line of Credit (HELOC) and then advance the funds as needed throughout your home improvement project. But this option comes with drawbacks. “If considering a second position mortgage where your first position mortgage remains as is, you will be subject to higher rates than refinancing your first mortgage and the interest may not be tax deductible,” says Durhman.
CONSIDER THE TIMELINE
“Renovation loans can take longer to get approved than a traditional refinance loan,” says Durhman. This is because the approval process must include not only the borrower’s credit approval, but also approval of the general contractor and the renovation project. “This requires added documentation about the general contractor and project,” says Durhman, “which is submitted to the appraiser to determine the as-completed value of the home. After the renovation loan closes and funds, the renovation project begins and there is a detailed process followed to fund the project.”
TAKE ADVANTAGE OF CURRENT LOW RATES
If you have the equity in your home, Durhman says the best route right now, with current low interest rates, is to get a traditional cash-out refinance or add a second mortgage, like a HELOC. “This avoids the need to have the more detailed approval project and post-closing draw process,” he says. “However, renovation loans meet a valuable need in the market when you do not have the equity present in the home to access the funds through a cash-out refinance or HELOC.”
Above all, Durhman advises loan shoppers to consider three components of their renovation loan: rates, fees and turn-times on the underwriting. This will give you a clear idea of how much the project is going to cost you, and how long it’s going to take, so there won’t be any surprises. These will vary between loan providers, so it’s important to do your research and find the best match for your needs.