10 Ways to Finance Your Next Home Improvement Project.
1. Mortgage Refinance (Refi)
If you are a homeowner, then you probably already know about this option. It's your mortgage, just starting it over.
Low Payment: You can get up to 30 years to repay, making for possibly the lowest monthly payment you can get in the finance world and probably the lowest long-term interest rate you can get as well.
Consolidation: You can potentially reduce your total monthly out-of-pocket costs by refi-ing and consolidating home improvement costs into a mortgage. This can be especially beneficial if you are currently in a higher interest rate mortgage and your current mortgage is almost paid off.
Time: If you need your home improvement paid for today, then waiting 30 days to process a refinance isn't going to work. Also, time and interest rates are best friends, the longer it takes to pay off the loan the more your end up paying over time
Paperwork: Get ready to give a mortgage company an hour of your life just in filling out paperwork and giving them documentation about your finances over the last 2-3 years.
- sufficient income
- good credit
- at least 20 percent equity in their homes
2. 2nd Mortgage
You probably already know about this too, or should I say two, as in 2nd. It's a mortgage, only now you would have another one. It is subordinate to your first mortgage, meaning there is a higher risk of the lender not getting paid back. More risks means more interest and fees.
- With credit card rate as much as 29.99%. If your FICO score and property valve doing well a 2nd mortgages can be around 5-6%.
- Home improvements aren't cheap, to add insult to injury getting cheap improvements done might make things worse. A second mortgage gives access to higher quality improvements that didn't fit into your cash only budget.
- High quality improvements can increase to the value of your home, possibly as much as the value of the loan.
- Fees: Since 2nd mortgages are typically of smaller value than 1st mortgages, lenders like to load them with fees to make a heftier profit. Fees for an appraisal, application, and closing costs are pretty normal, some even add a monthly maintenance fee.
- Risk: If you can't make the payment you could lose your home.
3. Home Equity Line of Credit (HELOC)
This is like having a credit card that's guaranteed by your home.
1. Access: Once the HELOC account is open you can make purchases as you with.
2. Flexibility: Pay interest on the account balance, not the total value on the credit line.
3. Low payments: Some lenders allow you to pay less than the interest they charged for the month.
1. Adjustable rates: Rising interest rates can increase your payment and possibly make the payment unmanageable.
2. Risk: You're home is the collateral and the lender could force you into foreclosure if you are unable to pay.
- 15% to 20% equity in your home
- 40% to 50% debit-to-income (DTI) ratio
- 620 FICO score or better
4. Credit Card
If you don't know what a credit card is you might be living under a rock.
1. Ease: If your contractor accepts credit cards, you have a high credit enough limit, and your interest rate is reasonable, then this is an easy way to pay.
2. Points: If you have a card that gives you points on your purchase this could be a perceived discount to you contact price.
1. Dangerous: Missing a payment could send your rate to 29.99% and if you have a large balance at this time it wouldn't be pretty.
2, Emergencies: If you tap out your credit limit and need to make an emergency purchase, then your credit card won't be there to help.
- If you have a pulse you can probably find someone to give you a credit card.
- All jokes aside, qualifications vary widely usually. If you apply for a credit card, then a lender will probably find one that fits you even if it's not the one your applied for.
5. Property Accessed Clean Energy (PACE) Financing
PACE financing is a loan you repay through an increase in your property tax bill. The loan can be used for water and energy improvements.
1. It is like your home is taking the loan. If you sell your, it is possible for the a buyer to assume the loan.
2. No FICO credit requirements and 5-30 year repayment terms.
3, These loans are a specific "pot of money" designed for water conservation and energy efficient improvements.
1. It's on you property taxes, you can't claim bankruptcy to get out of paying.
2. Forced foreclosure. While I have not ever heard of a PACE company foreclosing on a home, their disclosures say it's possible.
- 10% Equity
- No more than one 30 day late mortgage payment in the past 6 months, No recorded notices of default,
- 2 years with no bankruptcy or late property tax installments
6. Residential Energy Efficiency Loan (REEL) Program
REEL is a California state-sponsored loan program (CHEEF) that could potentially be repaid through a new line item on your utility bill. However, you (the borrower) do not have to be the a utility's customer to apply.
- No lien on your property
- No closing costs or origination fees
- Up to 30% of loan amount towards non-energy improvements
- Max Loan $50,000 ($35,000 with no credit history)
- Max term 15 years
- Possible personal guarantee needed
Typical Applicant Qualifications:
- Property owner or tenant with owner's written permission
- Min 580 FICO
- 55% Debt-to-income ratio
- No Derogatory credit reports
- Residential property: single-family home, duplex-quadplex, townhome/condo, or manufactured home (must be permanently attached to foundation) .
- Must have service from Socal Gas, SCE, PG&E, or SDG&E
- Some lenders may only finance single units
- Energy, gas or water eligible energy efficiency measures (EEEMs) (no energy generation improvements are allowed (i.e. no solar) (Examples of improvements: Air Sealing, Appliances, Artificial Grass, Cool Roofs, Duct Sealing, HVAC, Insulation, Lighting, Reflective Paint, Patio Covers, Pool Pumps, Water Heating, and Windows)
- At least 70% of loan cost must go toward EEEMs, 30% can go towards non-EEEMs
- Improvements must reduce consumption from Socal Gas, SCE, PG&E, or SDG&E to qualify.
7. Credit Based Financing
These programs look at your credit score and other factors to determine how much you can borrow and your interest rate.
1. No lien on home
2. Terms are typically limited to 12 years.
1. Can limit your ability to barrow more money.
2. Can be sent to a collections company.
- 640 FICO Score
- 45% Debt-to-income ratio
8. Equipment Lease or Service Agreement
Paid for via a monthly bill, you get the benefit of the improvement without the responsibility of ownership.
- You are usually not responsible for maintenance
- Will most likely offer a lower payment than ownership
- You don't own the equipment
- Any tax advantages of ownership are past on to the leasing company
- 680 FICO
- Good credit history
9. UCC Filing Backed Loan
This is a loan secured by specific or blanket collateral enforced by a UCC filing on your property's title.
UCC flings allow lenders to have security in their investment allowing them to take more risk in other areas
You could be forced into foreclosure if you don't pay the loan.
- 15% Equity
- 680 FICO
- Good credit history
10. Independent Lenders
"Angel Investors" as some call them, independent lenders, offer money out of their own pocket.
Qualifications vary greatly as the terms of the deal are based on each individual investors appetite for risk.
Bonus: Non-Traditional Financing Options
There are exotic types of loans with enticing features, don't they're definitely not for everyone. Some of these features may include:
- No payments for 10 years but own 15-20% of the property.
- A Silent 2nd mortgage, only repay (with interest) if you sell or refinance within a specific period of time.
- In-House Financing, loans written by your contractor.
- Money from a Loan Sharks, don't.