How do I know if a RenoFi loan is right for my project?
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Finding the right type of financing for your renovation project can be confusing. We get that.
But what can be equally as confusing is some of the terminology that you’ll undoubtedly come across when researching your options.
It’s important that you understand the different terms that are used so that you can make sense of things you’re being asked for by your lender or talked about by your contractor.
Below, we’ve compiled a complete A-Z glossary of useful terms you need to know so that you can use this as a handy checklist or reference point when securing the financing you need for your remodel.
A Comprehensive Glossary of Renovation Financing Terms
Amortization: This means paying off your loan over time with scheduled payments that cover both the principal and interest. Amortization is the process of the loan principal decreasing over the repayment term. A HELOC will typically have an interest-only draw period, followed by an amortization period during which both the principal and interest are repaid.
Appraisal: A home appraisal is where an appraiser makes a judgement on the value of your home based on research into recent sales of comparable homes in your neighborhood, the condition, size and type of the property and their experience. An appraisal is required by lenders to determine the risk of approving a loan. Typically, an appraisal is used to determine the current market value of a property, but an appraisal to determine the after renovation value of a home may also be requested for certain types of loan, including RenoFi Loans. Appraisals are typically paid for by the borrower.
Appraised Value: An appraised value is an appraiser’s indication of the value of your home and is typically used by a lender to determine the risk of approving a loan.
After Renovation Value (ARV): Some types of loans, including RenoFi Loans, let you borrow based on your home’s future value, also known as its ARV (after renovation value). This is the estimated value of your home after your renovation is complete and, in short, is based on the current value of the property plus the value added during a remodel. Borrowing against your home’s ARV will typically increase your borrowing power.
Borrower: The person (or people) who take out a loan and enter into an agreement to repay this over a period of time, usually with interest.
Borrowing Power: This is the amount of money that you are eligible to borrow based upon your financial situation and the criteria of a lender or loan type.
Cash-Out Refinance: A cash-out refinance is a mortgage refinancing option where an existing mortgage is replaced with a new one that has a larger loan amount than the original. This allows for cash to be released based on the equity that has been built up that can be used to pay for a renovation, amongst other things.
Closing: Also known as settlement, this is the last step of taking out a loan and when the disbursement of funds happens.
Closing Costs: Also known as settlement costs, these are fees that are paid when taking out a loan and that are paid at closing and are usually based on a percentage of the loan amount. These fees are payable in addition to interest.
Combined Loan to Value (CLTV) Ratio: CLTV is a fancy way of saying how much equity you will have in your home post renovation. Your CLTV is calculated by taking the value of your loan being used to finance the renovation plus your current outstanding mortgage balance and dividing by your home’s after renovation value.
Construction Loan: These loans are primarily intended for the purpose of building a home from the ground-up. Some homeowners also use these for major renovations as well. Construction loans have a progressive drawdown that means you or your contractor receive the loan amount in installments. They require refinancing and often have a higher interest rate than traditional mortgages.
Construction Plans / Drawings: These are typically 2D architectural drawings that show the details of a project. These may be required to be seen by lenders for renovation projects and will help to understand the scope of work.
Credit Score: Also known as a FICO® Score, this is a score that allows lenders to assess the creditworthiness of a borrower to allow them to determine risk and to approve credit applications. Credit scores range from 300 to 850, based on five factors: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts. A “good” score is considered to be between 760 and 739.
Credit Union: Similar to a commercial bank, a credit union is a type of financial institution but is a member-owned financial cooperative, meaning that it is controlled by its members and operated on a not-for-profit basis. RenoFi partners with credit unions to offer RenoFi Loans.
Current Market Value (CMV): Also referred to as Fair Market Value (FMV), this is the current resale value of your home on the open market.
Debt-to-Income (DTI) Ratio: Your DTI is a comparison between how much you owe and how much you make on a monthly basis and is expressed as a percentage of your combined debts divided by your combined gross monthly income. This is one of the most important metrics that lenders consider when you apply for a loan.
Down Payment: This is an up-front partial payment required for the purchase of a home or other expensive items and is paid in cash at the time of closing. A loan finances the remainder of the amount.
Draws: These are defined intervals at which you or your contractor can request funds to continue a project following an inspection and are common with construction loans.
Equity: This is the difference between your home’s current value and the amount you owe on your mortgage. If your home is worth $500k and your current mortgage balance is $350k, you have $150k equity in the property.
Fannie Mae HomeStyle Loan: A Fannie Mae HomeStyle Loan is a government-sponsored product that lets you finance the purchase (or refinance) and renovation of a property into a single loan.
FHA 203k Loan: An FHA 203k Loan allows you to finance both the cost of purchasing a property plus the cost of repairs in a single loan, much like a Fannie Mae HomeStyle Loan. It’s a government-sponsored mortgage (by the Federal Housing Administration) that is essentially a construction loan and is primarily intended to encourage homeownership amongst lower-income families (or those with a lower credit score) and to support the renovation of older properties and fixer-uppers as a primary residence.
Fixed-Rate: This is a fully amortizing loan where the interest rate remains the same (fixed) throughout the duration of the term.
Fixer-Upper: This is a property that requires repairs and renovation work but that can typically be lived in as is. Fixer-upper homes are popular with first time buyers and homebuyers who are looking for a great deal on a property in a great neighborhood because of the work that is needed.
General Contractor: This individual is responsible for overseeing your construction or renovation project and managing the involvement of specialized subcontractors such as plumbers or electricians.
Home Equity Line of Credit: Also known as a HELOC, a home equity line of credit lets you take out a line of credit using your home equity. You can use the line of credit for any major purchase and draw the money whenever you need it, allowing you to initially only pay interest on the money you’ve drawn, rather than the full loan amount. After an initial draw period, this is followed by an amortization period.
Home Equity Loan: A home equity loan (or second mortgage) lets you borrow a lump sum amount of money against the equity in your home on a fixed interest rate and with fixed monthly payments over a fixed term of between five and 20 years, much like your first mortgage except with a shorter term.
Home Improvement Loan: Home improvement loans are often unsecured personal loans that are advertised to homeowners as a way to finance a renovation project. This can also refer to home renovation loans and is often used as an umbrella term for different types of renovation finance.
Home Renovation Loan: Home renovation loans are the smartest way for homeowners to finance their entire renovation project, yet most people don’t even know that they exist or how they work. A home renovation loan is based on one key factor: after renovation value. Renovation loans use a home’s estimated after renovation value instead of its current home value to calculate how much a homeowner can borrow. This gives homeowners the credit for the increase in home value from the proposed renovation upfront.
HUD Consultant: Also known as a 203k consultant, a HUD consultant takes the role of project manager for FHA 203k and Fannie Mae HomeStyle Loans.
Inspections: When using a construction loan, frequent property inspections will be required to monitor the progress and to release funds.
Interest-Only Period: During this period, monthly repayments only pay for the interest and do not repay the principal.
Interest Rate: Interest is the cost of borrowing money from a lender and the interest rate is the percentage that is charged, usually expressed as APR (annual percentage rate). The total you repay on a loan is the principal plus interest.
Lender: A lender in the context of renovation financing is the party who makes funds available and who collects repayments and interest.
Lien: This is a right to possess and seize a property under certain conditions, usually when a borrower defaults on a loan that is secured against it.
Loan Amount: This is the total amount of money that is borrowed from a lender and that must be paid back over the duration of repayment term, usually in monthly payments.
Loan to Value (LTV) Ratio: This ratio is the % of your home that you will own and what % is being borrowed. If you buy a home and make a 10% down payment, the Loan-to-Value is 90%.
Monthly Payment: This is the amount that you will pay each month to repay the loan principal and interest. These will remain the same for the duration of the term on a fixed-rate loan or can fluctuate on a variable-rate loan.
Mortgage: This is a specialist type of loan that is used to purchase a property. When you take out a mortgage, you agree to repay the money that you’ve borrowed as well as interest.
Origination Fees: Some loan types and lenders will charge an origination fee. This is a processing fee and covers the cost of arranging the loan. These are usually charged as a % of the loan amount.
Outstanding Mortgage: Also known as the mortgage principle, this is the amount that you still owe on your mortgage. If you took out a $250k mortgage and you have paid off $50k, the outstanding mortgage balance will be $200k.
Personal Loan: A personal loan is a type of unsecured loan that has a fixed interest rate usually between 8% and 15%. Lending decisions are typically based upon an applicant’s credit score and income.
Refinance: This simply means that your existing mortgage is replaced with a new one. Your existing mortgage is paid off and a new one is taken out. Your new mortgage may have different terms or interest rates.
RenoFi Loan: A RenoFi Loan is a new type of home renovation loan that factors in what your home will be worth after the renovation, allowing you to borrow all of the money you need at the lowest rate possible. These loans combine the best bits of a construction loan with a home equity loan and can increase your borrowing power by an average of 11x.
Repayment Term: This is the agreed timeframe that a loan will be repaid over. This is sometimes known as the repayment period.
Second Mortgage: These are loans secured by a property in addition to a primary mortgage. A second mortgage is a lien on a property that already has another loan attached to it. The lien is secured against the equity in a home.
Secured Loan: Secured loans use your home as collateral. This means that if for any reason you are unable to keep up with your monthly payments, a lender is able to reclaim any outstanding balance by selling the property.
Tax-deductible: The interest on some types of renovation financing may be tax-deductible. This means that you can deduct the interest you’ve paid on your tax return. Typically interest is tax-deductible when your loan is secured against your home, when the loan is used to carry out substantial improvements that add value, prolongs its useful life, or adapt it for a new use and when the loan amount doesn’t go above $750k for a married couple or $375k for a single borrower.
Unsecured Loan: Unsecured loans, on the other hand, are not secured against your property and, therefore, pose a greater risk to lenders. If you default on the loan, your home cannot be sold to repay the debt. These typically come with a higher interest rate than secured loans.
Variable Rate: Also known as a floating or adjustable interest rate, variable rate loans do not have a fixed interest rate for the duration of the term and can fluctuate over time as a result of changes to an underlying benchmark interest rate or index.
If you’re unsure about any of the terms that relate to your RenoFi Loan, we welcome you to reach out to our team who will be more than happy to help.