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Financing Options 

 

If you need assistance in planning financing for your remodeling project, your mortgage lender can help you review some of your options. Listed below are some of the different types of lending that would be available for you to choose. Your financial advisor, banker or accountant can also help you determine what is best for you.

Fixed Rate Loans

Both interest rate and payment remain the same over the term of the loan. Loans can be amortized over the following terms: 10, 15, 20, 25, 30, and 40 years. The advantage of a fixed rate program is that it allows you to get a fixed rate, over a specified period, without being concerned about market fluctuations. This type of financing is recommended for borrowers who intend to stay in their house for a long period of time. Recently, some lenders have added an interest only feature to their fixed rate product menu.

Fixed Rate Balloons

Both interest rate and payment remain the same until the loan is due. Typically, the entire loan amount is due in either 3, 5, or 7 years. The advantage of balloon programs is that they tend to have the lowest rates, due to the fact that the entire balance must be paid off or refinanced at the end of the term. This type of financing is recommended for borrowers who know they will be leaving their current house in 3, 5, or 7 years.

The Renovation Loan

One of the best ways to finance that new kitchen or bath, or any addition or renovation you are planning, is to take a look at "The Renovation Loan". The Renovation Loan has been used for years and one of the main reasons to consider this type of financing is that the loan is based on the appraised value as completed. If owned less than 12 months, you are required to use the purchase price, plus the renovation cost as a base. If owned over 12 months, appraised value is used, if over cost.

Close Before Construction Begins

Of the several loans available today that allow the borrower to close before construction begins, one of the most popular of these loans is the:

One-Time Close

Highlights of the One-Time Close loans are:

►Renovation of existing home or new construction, primary residence or 2nd home

►Loans to $1,500,000

►Construction period up to 12 months

►ONE application - ONE closing

►Combines both remodeling loan and permanent mortgage all into one loan

►Loan is pre-approved and closed before construction

►No credit updates or re-qualifying at end of construction

►ONE set of fees - no duplication of costs and fees = saved money

►Loan is a one year ARM attached to the prime rate

►Interest only during construction on funds per draw request

►Gain tax deductions from interest paid during construction

►No escrows collected during construction

►Upon completion of construction or at one year, modify to a fixed or adjustable rate loan

►No pre-payment penalty

Two-Time Close

In today's market, the One-Time Close loan is becoming increasingly popular. However, there may be reasons you need the two-time close loans. The two-time close renovation loans are for those who want to finish with an Adjustable Rate Mortgage (rather than a fixed) or have second mortgages or Home Equity Lines of Credit that they want (and can) keep in place. Additionally, should an investor need the renovation loan, the two-time close is available for the remodeling of the investment or residential property. Some of the highlights of the two-time close are:

►Renovation of existing home or new construction, primary residence, 2nd home or investment property

►Construction period up to 12 months

►Finance up to 90% of appraised value AS RENOVATED or on cost basis

►Loan is pre-approved and closed before construction

►No pre-payment penalty

►Interest only during construction on funds per draw request

►Gain tax deductions from interest paid during construction

►No escrows collected during construction

►Upon completion of the renovation, close permanent loan into any type of program, whether it be fixed, an adjustable rate mortgage (ARM) or any loan in the market

Other Factors to Consider

The two most important items in any loan are the appraisal and credit report. Both of the above mentioned financing options require fairly good credit. One way to check your credit report AND get your credit score is to go to www.myfico.com on the internet. When you check your own report, the credit bureaus do not count the inquiry against you. Check your credit report carefully and make sure everything on it is correct.

An appraisal will be made on the property based on the completed value or after the renovation is complete. You just need to provide the appraiser with a set of plans for the renovation and the cost of the renovation or construction that you and your contractor have agreed upon. With all of the above being done, closing your renovation loan should proceed smoothly.

Loan Types

Conforming

Conforming loans refer to loan amounts that conform to government service standards as determined by Fannie Mae & Freddie Mac (the original government agencies, set up in the early 1940's, established to help people finance new homes). Conforming loan amounts change every November based on the Median price of homes sold that year.

Jumbo (Non-Conforming)

Jumbo loans refer to those loan amounts over the "conforming" range or above the conforming loan limit at the time.

Government Loans

Government loans refer to those loans that are guaranteed by one of two federal agencies. The two types of government loans are: Federal Housing Administration (FHA) loans and Veterans Administration (VA) loans. The advantages of FHA loans are that they are easier to qualify for and they allow a borrower to finance more of the loan amount than non-government loans.

Investment Properties (Non-Owner Occupied)

These types of homes are acquired for investment purposes. Financing for investment properties can be achieved using any of the above described programs. Typically, the rates for financing on investment properties are higher than owner-occupied homes and the LTV's allowed are lower, due to the fact that default rates tend to be higher on these types of loans.

Cash-Out Refinances

Occasionally, when refinancing a first trust, a borrower wants to "cash out" some of the equity that has been built into the loan. Under specific conditions established by the lender, a borrower can actually receive a check for an amount of money that meets those conditions. Cashing-out is not normally limited to any type of loan program, it can be done with most of the described programs.

Second Mortgages

Equity Seconds

Equity seconds are second mortgages that use the equity you have in your house as the basis upon which a lender loans you money. Most lenders will require an appraisal in order to establish your house's value and the equity contained therein. Borrowing with an equity second normally allows you to obtain a better rate due to the fact that the money borrower is secured on property you have ownership in.

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