An Expert Guide To Home Renovation Loans and How Home Improvement Loans Work

Are you looking for an easy affordable way to renovate or repair your home?

A renovation loan can help you do just that. Home renovation loans are the smartest way for homeowners to finance home improvements, yet most people don’t even know that they exist!

A renovation loan is defined by one key factor: after-renovation value. Home renovation loans are the ONLY type of loan that gives homeowners credit for a home’s future value.

When it comes to financing your renovation project, you’ll come across various options like construction loans, FHA 203(k) Loans, and Fannie Mae Homestyle Loans. However, if you’re seeking a financing solution tailor-made for renovation needs, look no further than The RenoFi Loan.

Traditional lenders limit the amount you can borrow with a home equity loan to 80% LTV, whereas with a RenoFi home equity loan, you can borrow up to 150% of the home’s current value.

The best part? RenoFi is the ONLY option that wholly caters to the financing needs of homeowners who don’t want to settle for fewer renovations on their wishlist.

This expert article will discuss how to apply for renovation loans, requirements, interest rates, pros and cons, and home remodeling loan alternatives, and review the best and worst home renovation loans on today’s market.

Let’s dive in!

What is a Renovation Loan and How Do They Work?

A renovation loan is a type of loan that provides funding specifically for home improvement projects. Home renovation loans allow you to finance renovations without tapping into personal savings.

They work by providing homeowners with funds that can be used to cover the cost of the renovation project like a bathroom remodel. The loan amount is typically based on the estimated cost of the project and after-repair value. The loan can be repaid over a set period of time with interest. There are two main types of home improvement loans: secured loans like home equity loans and unsecured loans like personal loans.

Renovation Loan Expert Tip: It’s easy to get confused about the term “home renovation loan”. That’s because some products offered as “home improvement loans” or “renovation loans” are actually just rebranded unsecured personal loans or credit cards. Many of these rebranded products are not true renovation loans because they aren’t suitable for most renovation projects due to their high-interest rates, shorter terms, and limited loan size. A true home renovation loan gives homeowners credit for a home’s future value and uses the after-renovation value to help you get the lowest rate possible (which we’ll dive deeper into later in this guide).

Who Should Get A Renovation Loan?

A home renovation loan is best suited for individuals who are planning substantial home improvement projects and need financial assistance to cover the costs. It is ideal for:

1. Homeowners undertaking major renovations: If you are planning significant upgrades or remodeling projects that require a significant amount of funding, a home renovation loan can provide the necessary funds to cover the expenses.
2. Individuals looking to increase property value: Home renovation loans are beneficial for homeowners who want to increase the value of their property. By making strategic improvements, such as kitchen or bathroom upgrades or adding additional living space, you can enhance your home’s market value.
3. Those without sufficient savings: If you don’t have enough savings to finance your home improvement projects, a renovation loan can bridge the gap. It allows you to access funds upfront and repay them over time, making it more manageable financially.
4. Homeowners seeking competitive interest rates: Compared to other financing options like personal loans or credit cards, home renovation loans often come with lower interest rates. This can save you money in the long run, especially for larger projects.

When It’s Best To Get A Renovation Loan

Financing a renovation can be a viable option in various situations. Here are some scenarios when it may be appropriate to consider financing a renovation.

• Insufficient Savings: If you don’t have enough savings to cover the cost of the renovation project, financing can help bridge the gap and allow you to proceed with the improvements without depleting your savings entirely.
• Immediate Need(emergency renovations): If there’s an urgent repair or home renovation that needs to be addressed promptly, financing can provide the necessary funds to tackle the project without delay. This is particularly relevant for situations that affect the safety, functionality, or livability of your home.
• Project ROI: If the renovation is expected to add significant value to your home, such as kitchen or bathroom upgrades, it might be worth considering financing. The increased value can potentially offset the cost of borrowing in the long run, especially if you plan to sell the property in the future.
• Long-Term Enjoyment: Some renovations are done purely for lifestyle improvements and personal enjoyment. If you plan to stay in your home for an extended period and the renovation will significantly enhance your living experience, financing the project can be a viable option.

Renovation Loan Expert Tip: Consider your personal financial situation, budget, and long-term goals when deciding whether to finance a renovation. Evaluate the potential benefits, weigh them against the costs and risks of borrowing, and determine if the project aligns with your overall financial plan. Consult with a loan advisor for guidance tailored to your specific circumstances.

Is It a Good Idea To Get A Renovation Loan in 2023?

Yes, renovation loans are still a good idea in 2023. According to the Forbes Advisor, Global asset managers like Palisades Group predict that housing “inventory is approximately 46% below the historical average dating back to 1999”. Although the price of homes is expected to decline, data also shows that the available home inventory is still likely to remain relatively low.

Hence, if you’re hoping to move this year, don’t expect the inventory of available housing to increase any time soon. And, if you’re thinking of selling your home, you may be in for a surprise on how much it’s worth on today’s market. This makes a renovation loan a good idea if you’re already a homeowner looking to improve your living space or add home renovations that will increase your home’s future ROI

Also, renovation loans are a good idea in today’s economic climate because they spread the cost of a home renovation project out over time, making it more manageable for your budget. “Paying for a home renovation is a whole journey in and of itself. Every other major purchase we make in our life has a smart and easy financing solution attached to it. Buying a car? Get an auto loan. Buying a house? Get a mortgage. Going to law school? Get a student loan. Each of these is a purpose-built financial product for a specific use. Remarkably, until recently, most homeowners were unaware that renovation loans existed. Thankfully, renovation loans, including RenoFi Loans, do!” says home renovation loan expert Justin Goldman.

What Are Interest Rates Like in 2023 and (What Should You Look Out For)?

To get the best possible rates, it’s important to do your research and compare rates from lenders. When considering rates, keep in mind that they can vary depending on several factors, such as your credit score, income, loan amount, and loan term. Home improvement loan APYs range anywhere between 6% to 35.99%.

Additionally, you may want to keep an eye on the Federal Reserve’s interest rate decisions, as they can affect the cost of borrowing money. In May 2023, Bankrate stated that the average home improvement loan interest rate was around 8%.

Renovation Loan Expert Tip: While reviewing rates, you should use a personalized home improvement loan calculator to assess how much your payments may be. Then, compare different types of home renovation financing options available such as home equity loans vs HELOC or cash-out refinancing.

Deciding if a Home Renovation Loan is Right for You

Overall, a home renovation loan can be a smart choice for those who want to improve their living space or increase the value of their homes. By carefully considering your options and working with a reputable advisor like RenoFi, you can find the right home remodeling loan for your needs and budget. As with any financial product, there are pros and cons to taking out a renovation loan.

Here are some of the advantages and potential drawbacks to consider:

Advantages of Renovation Loans

Renovation loans can provide the funding you need to make important home improvements, without having to rely on credit cards or tapping into your home equity. Additionally, many renovation loans offer competitive interest rates and flexible repayment terms.

• Access to substantial funds: Renovation loans provide borrowers with access to a substantial amount of funds to finance their home improvement projects. This allows homeowners to undertake larger-scale renovations or multiple projects simultaneously.
• Flexible usage: Renovation loans offer flexibility in how the funds can be used. Whether you’re planning to remodel your kitchen, renovate your bathroom, or add an extension to your home, you can use the loan proceeds to cover a wide range of renovation expenses.
• Competitive interest rates: Renovation loans often come with competitive interest rates compared to other forms of unsecured loans, such as personal loans or credit cards. Lower interest rates can result in significant savings over the life of the loan.
• Predictable payments: Home Equity Loans for home renovations come with fixed interest rates and set repayment terms. This means your monthly payments remain consistent throughout the loan term, allowing for better financial planning and budgeting.
• Potential tax benefits: In some cases, the interest paid on renovation loans may be tax-deductible, depending on the purpose of the renovations and local tax regulations. 
• Increased home value: By investing in home improvements through a renovation loan, you have the potential to increase the value of your property. Renovations that enhance functionality, aesthetics, or energy efficiency can attract potential buyers and potentially yield a higher resale value.
• Streamlined application process: Some lenders offer streamlined application processes for renovation loans, making it easier and faster to secure the financing you need. This can save you time and effort compared to traditional home equity loans or refinancing options.

Disadvantages of Renovation Loans

• Additional debt: Taking out a renovation loan means adding a new debt obligation to your existing financial commitments. It’s crucial to ensure that you can comfortably manage the monthly loan payments and find a low-interest option like a RenoFi loan. 

• Collateral requirement: Some renovation loans, such as home equity loans or cash-out refinancing, may require collateral, typically in the form of your home. 

• Loan qualification criteria: Like any loan, renovation loans come with eligibility requirements. These may include factors such as credit score, income verification, and debt-to-income ratio. If you don’t meet the lender’s criteria, you may have difficulty obtaining a renovation loan or may be offered less favorable terms.

  Renovation Loan Expert Tip: A RenoFi Loan is perfect for homeowners who would otherwise be considering a traditional home equity loan or cash-out refinance that would benefit from an appraisal based on the future home value. This factor can increase borrowing power by more than 11x while also ensuring that the lowest possible interest rate is secured.

Requirements for Renovation Loans

To be eligible for a renovation loan, you’ll typically need to meet certain requirements, including:

Credit Score Requirements

Most renovation loans require a minimum credit score of 620 or higher. However, some home remodeling loans may require a higher credit score, so it’s important to check with your lender to determine their specific requirements.

Income and Employment Requirements

You’ll also need to have a stable income and employment history to qualify for a renovation loan. Lenders will typically look at your income and employment history to ensure that you can afford the loan payments.

Property Eligibility

The property you’re renovating will also need to meet certain eligibility requirements. For example, it must be your primary residence, and it must meet certain safety and livability standards.

Other Eligibility Factors

Other factors that may affect your eligibility for a renovation loan include your debt-to-income ratio, your financial history, and the type of renovation project you’re planning.

How to Apply for a Renovation Loan

Find a Lender

Look for lenders who have experience working with homeowners and who offer competitive interest rates and fees. You may also save time by quickly applying for a fixed-rate low-interest RenoFi loan. 

Prepare for the Pre-Approval Process

Before you apply for a renovation loan, you may want to consider getting pre-approved. Pre-approval can give you a better idea of how much you can borrow and what your interest rate and loan terms may be.

Submit Required Documentation

To apply for a renovation loan, you’ll typically need to provide documentation such as proof of income, employment history, and credit score.

Complete Your Renovation Loan Application 

Once you’ve gathered all of the necessary documentation, you can submit your loan application. Your lender will review your application and may ask for additional documentation or information.

Types Of Home Renovation Loans Available

• Personal Loan
• Home Equity Loan
• HELOC
• Cash-out Refinance
• FHA 203k Rehab Loan

Personal Loans

Home improvement personal loans are unsecured loans that can be used for home improvements. They generally have higher interest rates than secured loans, but may be easier to qualify for if you have good credit.

Personal Loan Costs & Fee Considerations:

• Interest Rates: Personal loans typically have higher interest rates compared to other types of loans secured by collateral, such as home equity loans or cash-out refinancing. The average interest rate for a home renovation personal loan is around 25%.
• Origination Fees: Many personal loans come with origination fees, which are upfront charges for processing and funding the loan. These fees are usually 3% to 5% of the loan amount.
• Repayment Terms and Fees: Personal loans for renovation may have shorter repayment terms compared to home equity loans or cash-out refinancing. While this can mean a quicker payoff, it also translates to higher monthly payments. Additionally, some lenders may charge prepayment penalties if you decide to pay off the loan early.

Renovation Loan Expert Tip: Using personal loans for home improvements or credit cards is one of the worst mistakes a homeowner can make during a home renovation project. Largely because unsecured loans have higher interest rates, shorter terms, and lower limits on loan amounts.

Home Equity Loans

Home equity loans allow homeowners to borrow against the equity they have built up in their homes. They are typically given as a lump sum and have lower interest rates than personal loans, but require you to use your home as collateral.

Home Equity Loan Costs & Fee Considerations

• Interest Rate: Home equity loans typically have fixed interest rates, which can range on average from around 3% to 15% depending on factors such as your creditworthiness and the loan term.
• Closing Costs: When taking out a home equity loan, you may encounter closing costs, which can include appraisal fees, origination fees, title search and insurance fees, and other related expenses. These costs can vary but typically range from 2% to 5% of the loan amount.
• Annual Fees: Some lenders may charge an annual maintenance fee for home equity loans, which can range from $50 to a few hundred dollars per year.

Renovation Loan Expert Tip: Home equity loans are the most common loan for renovation because they are secured by your home. This makes them less risky for lenders than unsecured personal loans. As a result, home equity loans typically have lower interest rates than unsecured personal loans.

Home Equity Lines of Credit (HELOCs) 

HELOCs work similarly to home equity loans but allow you to draw funds as needed, rather than receiving a lump sum. They also use your home as collateral and have variable interest rates.

HELOC Costs & Fee Considerations:

• Interest Rate: HELOCs usually have variable interest rates, which are often tied to a benchmark rate like the prime rate. Rates can start lower than those of home equity loans but may increase over time.
• Closing Costs: Similar to home equity loans, HELOCs may also have closing costs, including appraisal fees, origination fees, title search and insurance fees, and other associated costs. These expenses can range from 2% to 5% of the credit limit.
• Annual Fees: Some lenders impose an annual fee for HELOCs, typically in the range of $50 to a few hundred dollars per year. However, not all HELOCs have annual fees.

Renovation Loan Expert Tip: Traditional HELOC lenders allow you to borrow against the equity you’ve built up in your home. Yet, if this isn’t sufficient to give you the funds you need to finish your renovation project, you’ll likely be forced to reduce the scope of your project to make up for the shortfall. For homeowners who have been in their homes for 10+ years, this is less likely to be an issue, but for recent homebuyers, a RenoFi loan is likely the way to go to avoid this potential issue.

Cash-Out Refinance

With a cash-out refinance, you replace your existing mortgage with a new one that has a higher balance, allowing you to take out the difference in cash. This can be a good option if you have a lot of equity in your home and can qualify for a lower interest rate than your current mortgage.

Cash-Out Refinance Costs & Fee Considerations:

• Interest Rate: Cash-out refinancing involves refinancing your existing mortgage and taking out a new loan with a higher balance. The interest rate for the new loan will depend on current market rates and your creditworthiness.
• Closing Costs: Cash-out refinancing generally incurs closing costs similar to those of a mortgage. These costs can include appraisal fees, origination fees, title search and insurance fees, and other expenses. Closing costs typically range from 2% to 5% of the loan amount.
• Mortgage Insurance: Depending on the loan-to-value ratio of your new loan, you may be required to pay private mortgage insurance (PMI) if you have less than 20% equity in your home. PMI can add to the overall cost of refinancing.

Renovation Loan Expert Tip: RenoFi Cash-out Refinancing allows you to take out more cash than you’ve ever been able to before, because you’re drawing from your home’s future equity, after the renovation. Yet, traditional cash-out refinancing only lets you take cash out from the current home equity you have built up. If you’ve just refinanced or purchased a home, that’s probably not a lot.

FHA Rehab Loans

FHA rehab loans are loans insured by the FHA that allows borrowers to finance the purchase or refinance and renovation of a home with a single mortgage. There are two types of FHA rehab loans: the standard 203 (k) loan and the limited 203 (k) loan. The standard 203 (k) loan allows for large-scale and structural work, while the limited 203 (k) loan only covers non-structural repairs. There is also a special 203 (h) loan for victims of natural disasters who want to buy or rebuild a home in a declared disaster area. The 203 (h) loan can be used with or without the 203 (k) loan. It’s worth noting that FHA Rehab loans have specific requirements for the types of repairs and renovations that can be financed. There are limits on the maximum loan amount based on the property’s value and location (which tend to be quite low).

FHA Rehab Costs & Fee Considerations:

• Upfront Mortgage Insurance Premium (UFMIP): FHA Rehab loans require borrowers to pay an upfront mortgage insurance premium. This fee is typically 1.75% of the loan amount and is paid at the time of closing. The UFMIP helps protect the lender in case of default and is a one-time cost that can be financed into the loan amount. FHA Rehab loans also require borrowers to pay an ongoing monthly insurance premium (MIP)
• Down payment: You’ll be required to put a 3.5% down payment based on the value of your home and renovation costs
• Closing Costs: Like any other mortgage loan, FHA Rehab loans come with closing costs. These costs can include appraisal fees, title fees, attorney fees, and other miscellaneous expenses associated with the loan origination process. Generally the rate is anywhere from 2% - 6% of the total loan amount.

Renovation Loan Expert Tip: The FHA 203 Rehab loan is a government-backed renovation loan that can be used for home improvements. It does not require you to have equity in your home and has relatively low interest rates, but may have much lower borrowing limits than other types of loans.

5 Expert Tips To Find The Best Renovation Loan Lenders

1. Compare lender rates: Do your research and compare the rates, terms, and fees of multiple lenders. Look for lenders or loan advisors that specialize in home improvement loans with a good reputation like RenoFi. 

1. Check the lender qualifications: Make sure the lender is licensed and registered in your state. You can check this information with your state’s regulatory agency. Additionally, check the lender’s ratings with the Better Business Bureau and other review sites.
2. Consider the loan terms: Look at the loan terms, such as interest rates, repayment periods, and fees. Choose a lender that offers favorable terms that fit your financial situation and budget.
3. Look for flexible options: Consider lenders that offer flexible payment options, such as a fixed or variable interest rate, and the ability to choose your repayment period. This can help you tailor your loan to your specific needs.
4. Read the fine print: Before signing on the dotted line, read the lender’s terms and conditions carefully. Make sure you understand all the fees, penalties, and other terms of the loan. If something is unclear, ask the lender for clarification.

An Expert Review Of The Best to Worst Renovation Loan Options

There are several renovation loans available to homeowners. In this expert review, we’ll explain how each renovation loan works, and highlight the pros vs cons of each. Below are the most common true renovation loan options (as previously explained) from best to worst:

• RenoFi Renovation Home Equity Loan
• Single Close Construction To Permanent Loan (CTP)
• Fannie Mae Homestyle Loan
• FHA 203k Rehab Loans
• VA Renovation Loans

Before you review the pros vs cons of each home renovation loan option, here is a side-by-side comparison for a quicker view of the facts behind each different type of renovation loan:

A Side-by-Side Renovation Loan Comparison

1. RenoFi Home Equity Renovation Loan Pros vs Cons

A RenoFi Loan is a new type of renovation loan that combines the best elements of a construction loan with a home equity loan. It’s the only renovation loan that doesn’t require the funds to be disbursed to the contractor through a messy inspection & draw schedule process. Like all true renovation loans, RenoFi Home Equity Loans are based on the after-renovation value allowing homeowners to borrow the most money at the lowest possible rate possible.

 RenoFi loans are the best renovation loans because they are primarily based on the after-repair cost of your renovation and not your current home’s value, and are renowned for their low rates and affordable options. This gives you an opportunity to get larger loans at the best rates. 

How RenoFi Loans Work:

RenoFi Loans work for existing homeowners or homeowners purchasing a new home and renovating. RenoFi offers three different types of RenoFi Loans: the RenoFi Home Equity Loan, the RenoFi Home Equity Line of Credit, and the RenoFi Cash-out Refinance. Each of these is slightly different, but they all have a few things in common:

• Your borrowing power is based on your home’s after-renovation value
• You don’t need to deal with draws and inspections during your renovation project
• It’s the only type of loan/refinance option designed by a homeowner, specifically created for renovation projects

Pros:

• Does not always require homeowners to refinance their first mortgage, meaning homeowners can keep their low rates and avoid restarting the clock on their mortgage if they don’t want to. Same Low Home Equity rates - for 10 to 20-year terms, rates are typically the same as a traditional home equity loan or line of credit.
• Lower fees - because the loan doesn’t require you to refinance if you don’t need to, you can pay less in closing costs because it’s based on a smaller base.
• Can borrow $20k to $500k.
• For homeowners that do want to complete a cash-out refinance, the RenoFi Cash-out Refinance lets you take out 11x more money on average (compared to a traditional cash-out refi) because you’re taking from your home’s future equity, after the proposed renovation.
• It’s the only renovation loan that doesn’t always require homeowners to refinance and it’s the only renovation loan that doesn’t require the funds to be disbursed to the contractor through a messy inspection & draw schedule process.

Cons:

• Because home equity loans typically max out at 20-year terms, the monthly payments for these loans are often a bit higher than payments for other renovation loans with a term of over 30 years.

2. Construction Loans (CTP) Pros vs Cons

This is a construction loan, (sometimes referred to as ‘Single-Close Construction To Permanent Loan’) type of renovation loan that converts to a new permanent first mortgage and replaces your existing mortgage in the process. So in that way, it’s like a cash-out refinance but based on the after-renovation value.

How Construction Loans Work:

Construction loans require the money to be paid to the contractor, not the homeowner, through a milestone-based disbursement schedule that requires onsite inspections by the bank.

Pros:

• Low monthly payment - Like a traditional mortgage, because you can spread payments over 30 years, your monthly payment is as low as it can be.
• Low rates - Rates are typically in line with the market rate for first mortgages though some lenders can charge a premium.
• Can borrow $1 million+
• Options to convert to a traditional 30-year fixed or specialty loan offerings like Adjustable Rate Mortgages (ARMs)
• Single close means you only sign one set of documents and pay one set of closing costs.

Cons:

• Many contractors simply refuse to take on projects that are using construction loans due to the headaches involved with the inspections and disbursement schedule.
• Because you are refinancing, you might be refinancing at a higher rate.
• Because you are refinancing, you have to pay typical closing costs PLUS the extra costs associated with the construction loan, making it one of the most expensive loans on the market from a fees perspective.
• Because you are refinancing, you are starting the clock over on your mortgage which slows down the rate at which you build equity in your home.

3. Fannie Mae HomeStyle Renovation Loan Pros vs Cons

A Fannie Mae HomeStyle Renovation Loan is another type of government-backed loan that can be used to finance home renovations. This loan is ideal for borrowers who have a good credit score and want to borrow a larger amount of money. HomeStyle Renovation Loans can be used for a variety of renovation projects, including kitchen and bathroom remodels, room additions, and exterior renovations.

How The Fannie Mae HomeStyle Loan Works:

Fannie Mae homestyle loans are a specific type of construction loan insured by Fannie Mae, a government-sponsored agency. This affiliation with Fannie Mae comes with some pros and cons:

Pros:

• Ability to borrow up to 95% of the future value of your home (the after-renovation value), though this requires you to pay Private Mortgage Insurance (PMI) if you go above 80%. As a point of comparison, private banks often limit renovation loans to 80%, and while some will allow you to go to 85% or 90% loan to value, we’ve never seen any that allow up to 95%.
• Single close means you only sign one set of documents and pay one set of closing costs.
• The standards for a borrower are not as stringent as you’ll find with the private bank offering, meaning elements like your credit score don’t need to be as strong to qualify.
• Ability to spread payment over 30 years.

Cons:

• Higher rate - Fannie Mae HomeStyle mortgage rates are typically higher than the interest rate you can get by doing a construction loan through a private bank. Only available on conforming loan limits which vary by area.
• Many contractors simply refuse to take on projects that are using loans like this due to the headaches involved with the inspections and disbursement schedule. 
• Because you are refinancing, you have to pay typical closing costs PLUS the extra costs associated with these types of loans, making it one of the most expensive loans on the market from a fee perspective.
• Because you are refinancing, you might be refinancing at a higher rate.
• Because you are refinancing, you are starting the clock over on your mortgage which slows down the rate at which you build equity in your home.

4. FHA 203(k) Loan Pros vs Cons

A FHA 203(k) loan is a government remodel loan to renovate a home that is designed to help homeowners finance major home renovations. This type of loan is ideal for borrowers who don’t have a lot of equity in their home and need to borrow more than the home’s value. FHA 203(k) loans can be used for a wide range of renovations, including structural repairs, room additions, and energy-efficient upgrades.

How FHA Loans Work:

FHA 203K loans are like 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 pros like lower credit score requirements and some cons like higher rates & costs:

Pros:

• Ability to borrow up to 96.5% of the future value of your home (the after-renovation value), though this requires you to pay Private Mortgage Insurance (PMI) if you go above 80%. As a point of comparison, private banks often limit renovation loans to 80%, and while some will allow you to go to 85% or 90% loan to value, we’ve never seen any that allow up to 96.5%.
• Single close means you only sign one set of documents and pay one set of closing costs.
• The standards for a borrower are lenient. For homeowners who don’t have great credit scores, this is your best option.
• Ability to spread payment over 30 years.

Cons:

• Higher rate - FHA 203k mortgage rates are higher than all other renovation loan options.
• In addition to the higher rate, FHA mortgage insurance is required upfront AND annually for the life of the loan. FHA loan limits are even lower than the conforming loan limits used by Fannie Mae. This varies by area. Find loan limits nationwide here.
• Many contractors simply refuse to take on projects that are using loans like this due to the headaches involved with the inspections and disbursement schedule. 
• Because you are refinancing, you have to pay typical closing costs PLUS the extra costs associated with these types of loans, making it one of the most expensive loans on the market from a fee perspective.
• Because you are refinancing, you might be refinancing at a higher rate.
• Because you are refinancing, you are starting the clock over on your mortgage which slows down the rate at which you build equity in your home.

5. VA Renovation Loan Pros vs Cons

If you’re a veteran, you may be eligible for a VA Renovation Loan. This loan is designed to help veterans finance home renovations, including accessibility upgrades and energy-efficient improvements. VA Renovation Loans offer flexible financing options and low-interest rates, making them an affordable option for veterans who want to improve their homes.

How The VA Renovation Loan Works:

VA renovation loans work similarly to traditional renovation loans. Eligible borrowers can finance both the purchase of a home and the cost of necessary renovations or repairs with a single loan. This allows them to complete their desired renovations without having to come up with the funds upfront.

Pros:

• Allows eligible veterans and active-duty military members to access affordable financing for home improvements.
• Offers lower interest rates than other types of loans, and borrowers can qualify for up to 100% financing.
• Allows borrowers to purchase a home and complete renovations or repairs with a single loan. This eliminates the need to apply for multiple loans or seek out alternative financing options, which can be time-consuming and costly.

Cons:

• The loan may require a higher credit score than other types of loans. 
• Borrowers may be limited in terms of the types of renovations or repairs they can complete with the loan.

RenoFi Home Renovation Loan Success Story

Meet our client, The Jenkins family.

The Jenkins family needed to do home improvements that cost $250,000. They purchased their home 5 years ago and were ready to do a two-story addition and kitchen remodel they’d been discussing for years. The only problem was, they didn’t have enough money saved to pay for home renovations. 

Their home’s value was $500,000, and they had an outstanding mortgage of $350,000.

• Renovation cost: $250,000
• Current home value: $500,000
• Current mortgage: $350,000

The Jenkins’ applied for a RenoFi home renovation loan and was approved for a RenoFi Home Equity Loan. The RenoFi Home Equity Loan allowed the Jenkins’ to borrow $250,000 which is 11x more than most traditional lenders offering home equity loans would have given them. 

Why did the RenoFi Home Equity Loan allow them to borrow 11x more than a traditional loan?

It all came down to the difference between using the home’s current value vs the after-renovation value - a common nuance of how renovation loans vs traditional loans work. 

So when using the current value of $500k, 80% = $400,000, and considering The Jenkins’ outstanding mortgage balance of $350,000, so $400k minus $350k = $50k. By using loan products that use the home’s current value, they can only borrow $50k. When it comes to traditional home equity loans, you can typically borrow up to 80% of the current home value.

Now, let’s compare that to using the after-renovation value of the home, $750,000. 80% of $750,000 = $600,000. And when you deduct the outstanding mortgage balance of $350,000 from the $600,000, they can get $250,000 to renovate! By taking into consideration the future value of $750,000, the family is ready to make their renovation dreams come true.

In the end, the Jenkins borrowed the full amount of money needed for their renovation, whereas, with the traditional home equity loan options, they would have been $200,000 short!

Whether you’re looking to borrow to cover the cost of remodeling a single room, such as your bathroom or kitchen; a couple of rooms; your entire home; or are even looking to finance an ADU; the loan option you choose can have a huge impact. It will determine your interest rates, monthly payments, the amount that you can borrow, and whether or not you’ll need to refinance your first mortgage. 

Take the next step toward your home renovation by learning if your project is eligible.

Why RenoFi Loans are The Best Home Renovation Loans on the Market 

BOOSTED BORROWING POWER! Like all types of renovation loans, RenoFi Loans use a home’s estimated after-renovation value instead of its current home value to calculate how much a homeowner can borrow, boosting homeowners borrowing power by more than 11x on average.

LOWEST RATES! After the renovation, a RenoFi Loan has the same rates as a traditional home equity loan, HELOC or cash-out refinance, depending on what product you use. Compared to personal loans, or credit cards, these are the lowest-cost solution to financing your renovation.

LOWER FEES! Just like a traditional home equity loan, RenoFi Home Equity Loans have incredibly low fees compared to first mortgages. And because RenoFi partners with credit unions, RenoFi Loans have the lowest fees in the industry!

NO DISBURSEMENT SCHEDULE! It’s the only renovation loan that doesn’t require the funds to be disbursed to the contractor through a messy inspection & draw schedule process. Many contractors simply refuse to take on projects that are using construction loans due to the headaches involved.

WORK FOR PROJECTS OF ALL SIZES! Unlike a typical home renovation loan which only works for major home renovation projects, a RenoFi Home Equity Loan is a good option for something as simple as finishing your basement ($20k-$50k), up to a total home remodel ($250k-$500k+).

How RenoFi Can Help

If you’re looking for the best home renovation loan to finance your renovation project, it helps to have as much information as possible.

And that’s why we’re here.

RenoFi can help you learn more about your loan options and find the best lenders available to get you started.

RenoFi Renovation Loans not only increase your borrowing power based on the after-renovation value of your property, but they offer lower interest rates and monthly payments than almost any alternative.

Plus, we partner with awesome credit unions who help us offer these lower rates and give you even more flexibility based on your financial situation.

Sound pretty great? Click the button on the right to Find A Lender.

Home Renovation Loan FAQs