You’re finally ready to remodel your outdated kitchen, but how will you pay for it? From borrowing options to budget constraints, here’s what you need to know about financing a remodel.
After years (or even decades) of dreaming about the changes and improvements you want to make to your home, you’re now ready to pull the trigger on a remodeling project. But there’s still one big question to answer: How are you going to pay for it?
From borrowing options to budget constraints, there’s a lot to consider. Here, Twin Cities lending professionals and remodelers weigh in on what you need to know about financing a remodel — before you start swinging a hammer.
In most cases, you can’t execute a remodeling project without funding, but before you reach out to a lender, it’s smart to interview a couple of remodelers to get a better idea of costs. “You have to develop an understanding of the full project scope,” says Bjorn Freudenthal, vice president of business development for New Spaces. “It makes sense to have initial conversations — is this something we want to do? What is our capacity to borrow? Homeowners should also keep in mind how long they’re planning to stay in the home because that’s also going to inform and influence how far we go with the remodel.”
If you refinanced to a historically low interest rate in 2020 or 2021, a cash-out refinance likely isn’t an attractive option to finance your remodel. Instead, there are two other popular products: a fixed-rate home equity loan or a home equity line of credit (HELOC), both of which leverage the home’s equity but vary in the way money is distributed. With a home equity loan, the homeowners borrow a lump sum against the home’s existing equity. A HELOC, on the other hand, is a line of credit homeowners can borrow from — up to a fixed amount — on an as-needed basis.
All lenders have different lending criteria, so “do not start the remodel until you have the financing in place,” advises Sandy Oleson, Blaze Credit Union’s director of mortgage sales. “There have been times where people start a significant remodel, and then we’re stuck as far as being able to do the financing for them.”
There are financing programs available through certain lenders that will give you financing based on the value of the project after the proposed renovation is complete. “So you get what is called ‘future market value,’ and it can be used to calculate loan amounts, down payment requirements, and equity that you may gain from your project,” says Jason Fabio, founder and president of remodeling company Ispiri.
As with any type of construction project, there are often unexpected expenses that arise during a remodel, so if your loan-to-value ratio allows — the maximum LTV is typically 80% to 90% —“take out more than you need,” says Tim McNeil, vice president of mortgage sales and operations at Blaze Credit Union. “We have people who wish they would have taken out more, and then six, eight, 10 months later, they want to refinance their existing HELOC and take out another $20,000.”
While the financing product you choose should cover a large chunk of your project, “having expectations that you will be able to finance 100% of the project is probably unrealistic,” says Fabio. “There will always be an element of cash that you will need to bring to the table.”
Written by Taylor Hugo
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