During the recession, many homeowners lacked the funds for home renovation projects and were wary about spending money on a declining asset. Now that home values are rising, remodeling projects are regaining their popularity. Remodeling activity has been improving for the past four quarters, according to the Joint Center for Housing Studies of Harvard University's Leading Indicator of Remodeling Activity (LIRA) released in July 2013. The report estimated that $133.7 billion was spent on remodeling in the second quarter of 2013, an 8.6 percent improvement over the second quarter of 2012. Rising home values give homeowners more options for paying for a renovation, says Bill Trees, vice president and national program manager for renovation lending for Wells Fargo Home Mortgage in Colorado Springs, Colo. "The decision is different for each consumer, but you can use cash, refinance with a renovation loan or take out a home equity loan," he says. "Most banks today will do a combined loan-to-value of a first mortgage and a home equity loan up to 80 or sometimes 90 percent, but that may not be enough to pay for a renovation."
Refinance renovation loan
If you have less than 20 percent equity, a renovation loan may be the best financial option, suggests Brian Koss, executive vice president of Mortgage Network in Danvers, Mass. Refinancing via renovation loans, specifically FHA 203(k) and Fannie Mae HomeStyle Renovation loans, allow you to wrap home improvement costs into a new mortgage. The loan amount is based on the combination of your home's current appraised value and estimates of the renovation costs. For example, if your home is worth $200,000 and you want to spend $30,000 on repairs, your new loan amount would be $230,000. You can also wrap closing costs and fees into the loan. Sue Pullen, senior mortgage advisor for Fairway Mortgage in Tucson, says homeowners should consider refinancing with a renovation loan more often than they do.
"A lot of lenders don't know about these programs, but it's much better to refinance than to charge your remodeling projects to a credit card or to use up all of your cash," says Pullen. "The qualifications for renovation loans are the same as they are for any other refinance in terms of your credit score and your debt-to-income ratio."