Can you add renovation costs to a mortgage?

Whether buying a fixer-upper or looking to remodel a current home, both homebuyers and homeowners often wonder if they can add renovation costs to their conventional mortgage.

And on the one hand, doing this means a single loan and one monthly payment, but it doesn’t come without its drawbacks.

And in this guide, we’ll walk you through what these are; from higher interest rates and the extra steps that can cause significant delays.

If you’re looking for a way to combine renovation costs into your mortgage, we’ll help you to understand your options as well as introduce you to RenoFi Loans, a new type of home renovation loan that could be the perfect solution to financing your renovation.

Specifically, we’re going to take a look at:

How Can You Add The Cost of Renovating Your Home to Your Mortgage?

Options do exist that allow both homebuyers and homeowners to add the cost of a home renovation project to a mortgage. These include:

• FHA 203k Loans & Fannie Mae HomeStyle Loans

Government-sponsored renovation mortgages that let you finance the cost of purchasing (or refinancing) and renovating a fixer-upper or home that’s in need of repair in a single loan based on the after-renovation value of the property.

• Construction Loans

While primarily intended for the ground-up construction of a home, these loans are often considered an option for the simple reason that they let you borrow based on a home’s future value.

• Cash-out Refinance

Homeowners who have equity that they can tap into can refinance their mortgage to add the cost of renovations, but this will often be at a higher rate and increased monthly payments.

It’s important to understand, however, that while these options are out there, it doesn’t necessarily mean that they’re the best way to finance a renovation.

Homeowners and homebuyers often jump straight into looking at options that allow renovation costs to be added onto a mortgage for the simple reason that they haven’t got cash available to finance the projects they want to get started on upfront, don’t have the equity that’s needed to take out a home equity loan or line of credit and don’t want to take out a high-interest personal loan.

That said, you need to make sure that you’re considering your options carefully and go down the route that’s right for you. And this means understanding how the different options impact both your borrowing power and your monthly payments.

Why Homeowners & Homebuyers Want to Add Renovation Costs to their Mortgage

A home renovation project can be expensive. In fact, it’s not uncommon for it to cost $100k or more to work through an entire wishlist of projects, and this means that there’s often a need to look at financing options to cover this cost.

But before we dive deeper into the different options available, let’s first look at the reasons why both homebuyers and homeowners often want to add renovation costs to their conventional mortgage, rather than taking out a second mortgage such as a home equity loan or home equity line of credit or taking out a personal loan.

And to do this, let’s be clear on the different scenarios in which this option is being explored:

• Homebuyers: You’ve found a fixer-upper that you can see huge potential in, but need to borrow the money to renovate the house alongside the money to purchase the property to turn it into your dream home.
• Homeowners: You love where you live, but you’ve got a wishlist of projects that you’re eager to get started on. Whether that’s your bathroom, kitchen or a larger project like the build of an inground pool or an ADU, you need to find the best way to finance your renovation and are looking for the best option to make this happen.

But why is there often a wish to add renovation costs onto a conventional mortgage, rather than taking out a separate loan?

We can break this down into a few common reasons:

1. No Equity

When you don’t have equity available because you haven’t yet bought the property or have only recently done so, it’s easy to assume that the only option available to you is to combine your renovation costs into your mortgage to access the borrowing power that you need. Renovation mortgages such as the Fannie Mae HomeStyle loan or FHA 203k loan allow you to do this, letting you borrow against your home’s future value.

You do have another option, though; RenoFi Loans. We’ll introduce you to these shortly.

2. A Single Loan & Monthly Payment

Another common reason why people want to combine renovation costs with their mortgage is so that they’re only taking out a single loan and making one monthly payment.

If you’re a homebuyer, this often means trying to avoid additional closing costs and fees.

However, financing options that let you combine these costs into a single loan often come with a higher interest rate than a mortgage that only covers the cost of the property.

3. Lower Interest Rates

It’s not uncommon for homeowners to finance a remodel using a high-interest personal loan or credit card, but these typically come with scarily high-interest rates.

In fact, you can expect to see an interest rate of between 8% and 15% on a personal loan and even higher on a credit card.

And this means higher monthly payments.

The interest rates on mortgages are much lower and can help to make borrowing affordable and keep your monthly payments as low as possible.

Three Main Options for Adding Renovation Costs to Your Mortgage

There are three main financing options that exist to let you add renovation costs to your mortgage, but in comparison, each of these has its own drawbacks.

Below, we take a look at 3 different options and the pros and cons of each.

FHA 203k Loans & Fannie Mae HomeStyle Loans

An FHA 203k loan or a Fannie Mae HomeStyle Renovation Mortgage is a government-sponsored renovation mortgage that allows you to finance the cost of buying (or refinancing) a home that’s in need of repairs and the cost of renovating into a single loan.

Both of these renovation mortgages let you borrow based on your home’s after renovation value, but come at a higher cost than a traditional mortgage, with interest rates typically between .25% and 1% higher. Don’t forget that a higher interest rate means a higher monthly payment.

But these loans come with a number of drawbacks, including:

• Additional steps that can cause delays on closing the loan, like the requirement of hiring a construction inspector and receiving your loan amount in draws.
• The need to rush your renovation plans to meet the need of working to tight timeframes and have the whole scope confirmed upfront.
• Higher interest rates and fees than some alternatives.
• Restrictions on the type of renovations that can be financed (with an FHA 203k).

For those who have a lower credit score, however, these loans could be the best option. 

These have a lower requirement of 580+ on the FHA 203k Loan and 620+ for the Fannie Mae HomeStyle Renovation Mortgage.

To learn more about these loans and the potential drawbacks listed above, see our FHA 203k loans vs Fannie Mae HomeStyle loans guide.

Construction Loans

Construction loans have also traditionally been recommended as a way to finance a renovation project, often because, like with renovation loans, they let you borrow based on your home’s future value. And this can significantly increase your borrowing power.

But the reality is that you probably shouldn’t use a construction loan for your renovation. And we’re pretty set on this for the following reasons:

• You’ll need to refinance, often at a higher rate, unnecessarily increasing your monthly payment as a result.
• You’ll pay higher closing costs.
• A complicated draw process means you won’t get all of the money up front.
• They can frustrate contractors because they require a draw and inspection process.

Cash-out Refinance

If you’re a homeowner who is looking to combine the cost of a renovation into your existing mortgage, you might be considering a cash-out refinance.

But the truth is that most homeowners shouldn’t use a cash-out refinance for renovations.

Yes, this can be a way to combine your renovation costs into a single loan, but the drawbacks could mean that other options are going to be more suitable.

Here are the main drawbacks of using a cash-out refinance:

• Of course, you’ll need to refinance your existing mortgage to use this option, meaning it’s only available to existing homeowners looking to renovate. But often, this means refinancing onto a higher rate. And a higher interest rate means higher monthly payments.

  A 2019 study highlights that the number of homeowners who refinance into a HIGHER rate is as high as 60%, with this often accepted as the necessary trade-off to take cash out of their property.

• Your borrowing power will be less than the alternatives, given that you will only be able to tap up to 80% of your home’s current value.

  Even if you’ve built up equity, this is going to limit how much you can borrow when compared to most other options we’ve listed here.

• You’ll throw away money on closing costs that are often between 2% and 5% of the entire loan amount; significantly higher than the closing costs on a RenoFi Loan, which we’ll talk about below. You don’t need to pay these costs when alternatives exist.

It might seem like your options are limited when you need to borrow to renovate your home (or one you’re about to buy) and haven’t got equity available and want to avoid costly personal loans, but it’s likely that you’re just not aware of what all of these are.

How Much Does it Cost to Renovate a House in 2023?

The cost to renovate a house in 2023 will vary widely depending on several factors, including the location of the home, the size of the renovation, the quality of materials and finishes, and the complexity of the project. According to HomeAdvisor, the average cost of a home renovation in 2023 can range from $20,000 for a minor renovation to $150,000 or more for a major renovation. However, it’s important to keep in mind that renovation costs can quickly add up, and homeowners should budget accordingly and consider renovation financing options such as HELOC and home equity loans.

Introducing RenoFi Loans: An Alternative to Renovation Mortgages

We want to introduce you to RenoFi Loans; an alternative to combining the costs of your renovation into a second mortgage that we think you’ll want to know about.

A RenoFi Loan is a new type of home renovation loan that combines the best bits of a construction loan with a home equity loan. Let’s make one thing clear though; this is a second mortgage and cannot be used to pay for the purchase of a property and a remodel in a single loan.

But hear us out…

This new type of home renovation loan allows you to borrow based on your home’s after renovation value. That’s what it’ll be worth once your renovation has been completed, acknowledging that when you make improvements to your home, its value usually increases.

And for this reason, it can be a solution for those wanting to borrow the money that’s needed to renovate but don’t have enough equity available to tap into to use a home equity loan or home equity line of credit, either because they’ve not yet bought it or because they’ve only recently done so.

Using a RenoFi Loan can increase your borrowing power by up to 11x when compared with a traditional home equity loan, making it easier for you to borrow all of the money that’s needed.

And while a RenoFi Loan is a second mortgage, you’ll find that the interest rate is lower than you’ll pay with a Fannie Mae HomeStyle loan or an FHA 203k loan. It’s also the only type of home renovation loan that doesn’t require you to refinance your first mortgage (which is also required when using a cash-out refinance) and doesn’t come with the same complexities as a construction loan.

Want to learn more? Check out RenoFi’s How It Works page.

Quite simply, a RenoFi Loan allows you to purchase your new home with a traditional mortgage and finance your renovation when you’re ready, rather than being limited by the options that let you add renovation costs to your mortgage.

Here’s how these loans compare with some of the other common methods of financing a home renovation project that we’ve talked about:

Homebuyers often assume that they need to borrow the money that’s needed to renovate a fixer-upper when closing on their first mortgage.

RenoFi Loans are available both as a home equity loan or a home equity line of credit, offering you the flexibility of a line of credit that you can draw on over time as you work through renovating your home; perfect for those who have bought a fixer-upper and aren’t completely sure on the scope of a project before it begins.

Here’s what you need to know about RenoFi Home Equity Loans:

• Loan amounts from $20k to $500k
• Same low fixed rates as traditional home equity loans
• Term up to 20 years
• Ability to borrow up to 90% of the after renovation value
• Full loan amount available at closing

And here’s what you need to know about RenoFi Home Equity Lines of Credit:

• Loan amounts from $20k to $500k
• Variable rates
• 10 year interest-only period, followed by 20 year amortization
• Ability to borrow up to 90% of the after renovation value
• Line of credit that can be drawn down & paid back at your leisure for 10 years

For both homebuyers about to close on a fixer-upper or homeowners looking to work their way through their renovation wishlist, RenoFi Loans are a perfect way to borrow the money that’s needed without being forced into one of the limited options that will truly let you combine renovation costs into a mortgage, and we encourage you to arrange a call with one of our advisors or to use the RenoFi Loan Calculator to see how much you could borrow and what your monthly payments could be.

Top Things to Consider When Financing A Renovation

You might start out thinking that you need to add renovation costs to your mortgage, but that doesn’t necessarily need to be the case.

Even if you don’t have sufficient equity available to take out a home equity loan or line of credit, that doesn’t mean that there aren’t solutions that let you take out a second mortgage such as a RenoFi Loan.

And you certainly shouldn’t see yourself turning to a high-interest unsecured personal loan (often marketed as a home improvement loan) or credit card to finance the cost of your renovation.

However, there are some things that you should be considering regardless of the type of financing you think is most suitable and base your decision upon these things.

After all, not all financing options are right for every homeowner, so it’s important that you consider things like:

• How much money do you need to borrow to complete your renovation?
• How much equity do you have in your home that you can tap into?
• What’s your credit score and credit history?
• Do you have any other debt on other loans and credit cards?
• What is the maximum monthly payment you can afford?
• How long do you want to repay the loan over?

Understand the options that are available for you and choose the one that lets you borrow all of the money you need at the lowest monthly cost.

For many homebuyers and homeowners, that’s a RenoFi Loan. See if you're a good fit for a RenoFi Loan .

Choosing the wrong method of financing your home renovation projects is going to mean that you’re unable to borrow all of the money that you need (forcing you to reduce the scope of the remodel) or that you’re going to end up with massively higher monthly payments. Neither of which are ideas and both of which are unnecessary when alternatives exist.

Why not chat with one of our advisors to see whether a RenoFi Loan is the right choice for you and whether it could be a great alternative to adding renovation costs to your mortgage?