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What is the Best Way to Finance Home Improvements?

Your home is probably one of your most valuable assets, so investing in it by remodeling is a great way to add value. But what is the best way to finance these home improvements? Fortunately, there are many options when it comes to finding ways to afford a remodel. However, it can be difficult to figure out which one is best for your specific circumstances.

Our team at Lamont Bros. works with Portland area homeowners every day to transform their homes. For many, paying for the entire project in cash isn’t an option. That’s why we work with our clients to guide them through the process of finding the best way to finance their home improvements.

In this article, we’ll discuss our proven process for helping clients finance their home improvements. Whether your work with a company like Lamont Bros. or someone else, this process will help you ensure that you secure the right type and amount of funding for your project’s needs. The 7 steps we’ll cover are:

Step 1. Assemble Your Team

The best way to ensure that you can successfully finance your home improvements is to involve your remodeling team from the start of the financing process. Collaborating with professionals who understand the intricacies of both design and budgeting ensures that you make informed decisions while exploring the best ways to finance home improvements.

The process that our team has found most effective involves forming a partnership between the homeowner, the remodeling company, and the finance lenders. This approach allows each party to share their expertise and collaborate to find the best solution for the homeowners’ needs.

Step 2: Establish Your Project’s Budget Range

Before you begin exploring financing options, you’ll want to meet with a professional remodeling team to establish a budget range. A remodel design consultant can provide you with an approximate remodel budget based on your vision for the project.

Keep in mind that this is only an estimate of the total cost of your project, and the total cost may be more or less than the initial range quoted. The purpose of establishing this budget range is to help you decide whether you want to move the project forward and provides you enough information to begin discussions with a finance officer for your home improvements.

Step 3: Meet with a Loan Officer

Once you know approximately how much your remodel will cost, you can then explore your financing options with a loan officer.

While there are many different forms of financing that can be used to finance a remodel, there are three common types of loans we see most often.

It’s important to establish which one will work best for the project you’re planning. The price and construction process of your remodel will affect which financing options work best for you, which is why it is important to know your budget range before.

Option 1: Home Equity Financing

When your house is worth more than what you owe on it, you have equity. A home equity loan can help you access the money that is tied up in your home’s value and use it to finance various home improvements. This type of loan is often referred to as a “second mortgage,” because it essentially functions as an additional mortgage on the home.

Home equity loans financing is especially popular among homeowners who currently have a low interest rate on their first mortgage. Homeowners who have managed to secure low interest rate rarely want to renegotiate the terms of their original mortgage. Instead, they more often choose to finance their home improvements through a second mortgage to keep the interest rate low on the first one.

30 Year Fixed Loan Interest rates, 2020-2022. Data from Freddie Mac.

Option 2: Home Refinance

A cash out refinance is still in many ways a home equity loan. The biggest difference is that with this option, you combine your existing mortgage and equity loan into a single consolidated loan. A cash-out refinance can be a simple and convenient way to finance home improvements, particularly if you were already considering refinancing your home.

Opting for a cash-out refinance is an especially great option when mortgage rates are low. This is because it enables you to refinance your home at a reduced rate while also obtaining funds for a renovation. However, when interest rates are high, a cash-out refinance can significantly raise your monthly mortgage payment.

Option 3: Renovation Loan

Unlike an equity loan or refinance, a renovation loan allows you to borrow money based on the value of the improved home. For this reason, renovation loans are a great choice if you haven’t yet built up enough equity to be able to cover the cost of the renovations. There are 2 main types of renovation loans: federal and private.

Federally backed renovation loans, such as the Sallie Mae HomeStyle Loan, have smaller down payment requirements, but come with more regulations and hoops to jump through. On the other hand, private loans tend to have higher down payment requirements than federal loans, but offer a more flexible and personalized funding experience.

Renovation loans can be especially useful for whole-home renovation projects.

Step 4: Get Prequalified

After you’ve selected loan to finance your home improvements, you’ll then need to get pre-qualified. Prequalification is a credit estimate that shows lenders how much financing you can safely secure. It serves as confirmation that you are financially able to fund your remodel.

Here’s what you’ll need in order to get prequalified:

Employment History

Providing detailed employment and income history demonstrates financial stability and repayment capacity. This allows lenders to assess your eligibility and determine the lending amount you qualify for.

Typically, you’ll want to provide paystubs going back at least 2 years that demonstrate a steady income. The lender may also contact your employers to confirm the information you provide.

Assets, Debts, & Expenses

The lender will typically request you to share financial information, including assets, debts, and expenses. Information like this allows lenders a comprehensive view of your financial situation, allowing them to evaluate your debt-to-income ratio and judge ability to handle loan obligations.

Credit Check

A credit check assesses creditworthiness through reviewing your payment history, credit utilization, and credit score. It influences loan terms and interest rates. This is why providing accurate credit information is crucial for getting the best prequalification terms possible.

Step 5: Design Your Home Improvements

You and your design team will collaborate to develop a set of design plans for your renovation project. As your designs take shape, you’ll get to make specific decisions on the layout, materials, and appearance of your renovation.

Every renovation company handles the design process a little differently. Regardless of which contractor your hire, it’s important that they take an active role in keeping the project from exceeding the budget parameters established previously in the process.

Throughout the design process, a good contractor will consistently update and track projected costs for the renovations. This way, you run less of a risk of getting to the end of the design process and having a final cost that far exceeds your approved lending amount.

Step 6: Finalize Cost

Now that the design plans are complete, your build team will calculate the total cost of the project. If you work with a firm like Lamont Bros. that uses a fixed-cost contract, you’ll lock in your price once you sign the contract.

This step ensures that you have a clear understanding of the project’s financial aspects so you don’t encounter any surprises or exceed your approved lending amount. Without contractually confirming your construction costs up front, it can be more difficult to secure financing.

Step 7: Finalize Loan

Once your remodel has a set dollar amount tied to it, you’ll be ready to finalize your financing. It’s important to review the loan terms, interest rates, repayment schedule, and any associated fees or conditions carefully. Working closely with your lender and providing any additional documentation or information they require will ensure a smooth and timely loan approval process.

Once your loan is finalized, you can confidently move forward and witness your remodel take shape, knowing that the necessary funding is in place to support the project.

Want to Learn More About Remodeling Costs?

After reading through this article, you should now be more confident in your understanding of how to finance your home improvements. Take the next step in your research by reading about remodeling costs on our Pricing Page.

Ready to begin the process of financing your remodel? Click the button below to schedule a free design consultation with a member of our team. We’ll help you navigate the challenges of remodeling and put you in contact with financing experts so you can turn your current home into your dream home.