Ranking Renovation Loans from Best to Worst

In our previous post, we explained that renovation home equity loans are special because they are based on what the future value of your home will be AFTER the renovation. This key factor dramatically increases how much homeowners can borrow for their renovation.

But there is more than one type of renovation loan out there - in fact there are actually 5 different primary options. At RenoFi, the first thing we help homeowners with is understanding which type is best for you. Even though we do the hard work for you, we figured some homeowners would still like to understand all of the options available, hence this post.

Here are the rankings, from best to worst, with the analysis below:

  1. Renovation Home Equity Loan
  2. Single Close Construction To Permanent Loan (CTP)
  3. Fannie Mae Homestyle Loan
  4. FHA 203k
  5. Two Close Construction To Permanent

1) Renovation Home Equity Loan

How They Work: This is a new type of home equity loan that uses the future value of the home, post renovation, to calculate the Combined-Loan-To-Value (CLTV) ratio used in home equity lending. Thus, as a home equity loan, it doesn’t require homeowners to refinance their first mortgage. With so many homeowners locking in historically low rates in recent years, this is a highly attractive option for many homeowners.

Renovation Home Equity Loan

Renovation Home Equity Loan

2) Single Close Construction To Permanent Loan (CTP)

How They Work: This is a construction loan that converts to a permanent mortgage, most commonly a traditional 30 year fixed mortgage. In this case, this new loan replaces your current first mortgage, so in that way it’s exactly like refinancing.

Single Close Construction To Permanent Loan (CTP)

Single Close Construction To Permanent Loan (CTP)

3) Fannie Mae HomeStyle Loan

How They Work: This is a construction loan that converts to a permanent mortgage, most commonly a traditional 30 year fixed mortgage. In this case, this new loan replaces your current mortgage, so in that way it’s like refinancing. This is exactly like #2 on our list, the single close construction to permanent Loan (CTP), but it’s the conforming loan variation - that means, instead of being offered by private banks, this loan is insured by Fannie Mae, a government sponsored agency. This affiliation with Fannie Mae comes with some pro’s and con’s:

Fannie Mae HomeStyle Loan

Fannie Mae HomeStyle Loan

4) FHA 203k (Full)

How They Work: This is a construction loan that converts to a permanent mortgage, most commonly a traditional 30 year fixed mortgage. In this case, this new loan replaces your current mortgage, so in that way it’s like refinancing. This is exactly like #4 on our list, the Fannie Mae HomeStyle, but instead of being insured by Fannie Mae, this is insured by the FHA, also a government sponsored agency. This affiliation with the FHA also comes with some pro’s and con’s:

FHA 203k

FHA 203k

5) Two Close Construction To Permanent Loan (CTP)

How They Work: This is two separate loans. You start with a short term construction loan, usually 12 months. Then, once the renovation is complete, you take out a new loan, usually a 30 year fixed mortgage that pays off the construction loan. In a world where banks offer great single close options, it almost never makes financial sense to opt for a two close, two loan process over a single.

Two Close Construction To Permanent Loan (CTP)

Two Close Construction To Permanent Loan (CTP)

Side-by-Side Comparison

Here is a side-by-side comparison for a quicker view:

Side-by-Side Comparison of Renovation Loans

Side-by-Side Comparison of Renovation Loans

And that’s it! Now you’re better informed on renovation loans than most homeowners!

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