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Financing
Options
If you need assistance in planning financing for your remodeling
project, your mortgage lender can help you review some of your options.
Listed below are some of the different types of lending that would
be available for you to choose. Your financial advisor, banker or
accountant can also help you determine what is best for you.
Fixed Rate Loans - Both interest rate
and payment remain the same over the term of the loan. Loans can
be amortized over the following terms: 10, 15, 20, 25, 30, and 40
years. The advantage of a fixed rate program is that it allows you
to get a fixed rate, over a specified period, without being concerned
about market fluctuations. This type of financing is recommended
for borrowers who intend to stay in their house for a long period
of time. Recently, some lenders have added an interest only feature
to their fixed rate product menu.
Fixed Rate Balloons - Both interest rate and payment remain the
same until the loan is due. Typically, the entire loan amount is
due in either 3, 5, or 7 years. The advantage of balloon programs
is that they tend to have the lowest rates, due to the fact that
the entire balance must be paid off or refinanced at the end of
the term. This type of financing is recommended for borrowers who
know they will be leaving their current house in 3, 5, or 7 years.
Adjustable Rate Mortgage (ARM) - Both
interest rate and payment remain the same for a fixed time period,
usually 1, 3, 5, 7, or 10 years. At the end of that period the rate
can rise at fixed intervals. The amount the rate can increase is
predetermined (normally 1/2% to 2% per rise). The intervals are
normally 1, 3, 6, or 12 months. The advantage of an ARM is that
it allows you to get a lower rate and is recommended for those borrowers
who intend to stay in their house for a shorter period of time.
The Renovation Loan - One of the best
ways to finance that new kitchen or bath, or any addition or renovation
you are planning, is to take a look at "The Renovation Loan".
The Renovation Loan has been used for years and one of the main
reasons to consider this type of financing is that the loan is based
on the appraised value as completed. If owned less than 12 months,
you are required to use the purchase price, plus the renovation
cost as a base. If owned over 12 months, appraised value is used,
if over cost.
Close Before Construction Begins
Of the several loans available today that allow the borrower to
close before construction begins, one of the most popular of these
loans is the One-Time Close. Highlights of the One-Time Close loans
are:
Renovation of existing home or new construction, primary residence
or 2nd home
Loans to $1,500,000
Construction period up to 12 months
Finance up to 95% of appraised value AS RENOVATED or cost basis
ONE application - ONE closing
Combines both remodeling loan and permanent mortgage all into one
loan
Loan is pre-approved and closed before construction
No credit updates or re-qualifying at end of construction
ONE set of fees - no duplication of costs and fees = saved money
Loan is a one year ARM attached to the prime rate
Interest only during construction on funds per draw request
Gain tax deductions from interest paid during construction
No escrows collected during construction
Upon completion of construction or at one year, modify to a fixed
or adjustable rate loan
No pre-payment penalty
Two-Time Close
In today's market, the One-Time Close loan is becoming increasingly
popular. However, there may be reasons you need the two-time close
loans. The two-time close renovation loans are for those who want
to finish with an Adjustable Rate Mortgage (rather than a fixed)
or have second mortgages or Home Equity Lines of Credit that they
want (and can) keep in place. Additionally, should an investor need
the renovation loan, the two-time close is available for the remodeling
of the investment or residential property. Some of the highlights
of the two-time close are:
Renovation of existing home or new construction, primary residence,
2nd home or investment property
Construction period up to 12 months
Finance up to 90% of appraised value AS RENOVATED
or on cost basis
Loan is pre-approved and closed before construction
No pre-payment penalty
Interest only during construction on funds per draw request
Gain tax deductions from interest paid during construction
No escrows collected during construction
Upon completion of the renovation, close permanent loan into any
type of program, whether it be fixed, an adjustable rate mortgage
(ARM) or any loan in the market
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Other
Factors to Consider
The two most important items in any loan are the appraisal and credit
report. Both of the above mentioned financing options require fairly
good credit. One way to check your credit report AND get your credit
score is to go to www.myfico.com on the internet. When you check your
own report, the credit bureaus do not count the inquiry against you.
Check your credit report carefully and make sure everything on it
is correct.
An appraisal will be made on the property based on the completed value
or after the renovation is complete. You just need to provide the
appraiser with a set of plans for the renovation and the cost of the
renovation or construction that you and your contractor have agreed
upon. With all of the above being done, closing your renovation loan
should proceed smoothly.
Loan
Types
Conforming - Conforming loans refer to loan amounts that conform to
government service standards as determined by Fannie Mae & Freddie
Mac (the original government agencies, set up in the early 1940's,
established to help people finance new homes). Conforming loan amounts
change every November based on the Median price of homes sold that
year.
Jumbo (Non-Conforming)
- Jumbo loans refer to those loan amounts over the "conforming"
range or above the conforming loan limit at the time.
Government Loans - Government loans
refer to those loans that are guaranteed by one of two federal agencies.
The two types of government loans are: Federal Housing Administration
(FHA) loans and Veterans Administration (VA) loans. The advantages
of FHA loans are that they are easier to qualify for and they allow
a borrower to finance more of the loan amount than non-government
loans.
Investment Properties
(Non-Owner Occupied) - These types of homes are acquired for
investment purposes. Financing for investment properties can be achieved
using any of the above described programs. Typically, the rates for
financing on investment properties are higher than owner-occupied
homes and the LTV's allowed are lower, due to the fact that default
rates tend to be higher on these types of loans.
Cash-Out
Refinances - Occasionally, when refinancing a first trust,
a borrower wants to "cash out" some of the equity that has
been built into the loan. Under specific conditions established by
the lender, a borrower can actually receive a check for an amount
of money that meets those conditions. Cashing-out is not normally
limited to any type of loan program, it can be done with most of the
described programs.
Second Mortgages
Equity Seconds - Equity seconds
are second mortgages that use the equity you have in your house as
the basis upon which a lender loans you money. Most lenders will require
an appraisal in order to establish your house's value and the equity
contained therein. Borrowing with an equity second normally allows
you to obtain a better rate due to the fact that the money borrower
is secured on property you have ownership in.
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