Do you love your neighborhood and everything about where you live but aren’t thrilled with your home itself? It might be time to renovate your home. Today we’ll talk about four ways to finance your home renovation in Colorado.
Whether you need more space to accommodate a growing family, dream of a luxurious master bathroom, or crave a walk-in closet, home renovations allow you to maximize your home’s potential. Additionally, certain upgrades improve your house’s energy efficiency and increase your home’s resale value.
Many homeowners put off home renovations because they don’t think they can afford them. However, there are many ways you can pay for renovations and save money in the long run. In today’s article, I’m giving you four financing options that can help you make that renovation happen!
Tap Your Home’s Equity
A home equity loan with a second mortgage allows you to take out a loan based on the value of your home. Essentially, you put your home up as collateral to secure a loan. This loan works like any other, but the interest is tax deductible!
A second mortgage can be a great way to tap into your equity so you can pay for a home renovation in Colorado. It’s a wise investment if you use it to improve your home’s value. It’s a viable option for homeowners with a low interest rate on their first mortgage who wouldn’t benefit from refinancing their original mortgage.
Home Equity Line of Credit (HELOC)
Similar to a home equity loan, you can open a line of credit based on your home’s equity. The difference is that this loan functions like a credit card— you can withdraw money when you need it over the loan’s lifetime.
Your payments change based on the amount you’ve taken out and that month’s interest rate. One upside is that you only pay interest on the amount you withdraw and not on the total amount approved. Additionally, interest rates are usually lower than your average credit card, and payments are tax deductible.
This is an excellent option if you can pay off the amount you borrow reasonably fast— through selling another property, an upcoming pay increase, or an inheritance.
Renovation Financing Loan
If you don’t have much equity in your home, consider a renovation loan. For this loan, you refinance your current home and add the amount needed for the renovation to the same loan. The lender bases the loan on your home’s estimated worth once the renovation is complete. That means it’s one large loan, not a second mortgage.
This loan is meant to finance home renovations that will improve the value of your property. It requires that you work with licensed contractors. Rather than paying a lump sum directly to you, the lender pays the contractor as the work is done.
Cash-out refinancing is similar to renovation financing but has several significant differences. First, lenders base the loan solely on the current value of your home. That means you need to have equity in your home. Your original mortgage loan will be paid off, and the amount required for the renovation will be added to that cost and rolled over into the new mortgage.
Additionally, the funds for your renovation are given directly to you in one cash payment. You’re in charge of paying the contractors, so feel free to DIY or call in your neighborhood handyman.
This loan is ideal if current interest rates are low. As with any smart refinance, you can lower your interest rate and tap into your equity to finance a renovation. It’s basically a two-for-one special.
Make an Educated Decision
Any significant financial decision comes with various risks. Before you sign on the dotted line, consult your accountant or financial advisor. They will help you weigh the pros and cons of each option so you can confidently finance your home renovation in Colorado.
Don’t hesitate to reach out with any questions or concerns you have as a homeowner. I can help you determine what renovations would be suitable investments and review your loan options so you can maximize your investment.
I'm Lauren Haug! I'm a teacher-turned-real estate agent, and I teach people how to build wealth through real estate in Northern Colorado.
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