Renovation Loan Or Cash-Out Refinance

Did that last rainy-day land you with a leaking roof? Do you want to upgrade your bathroom to look like the one you saw in that magazine? Or is it just time for the usual home upgrade renovations? Whatever the reason for the renovation, the underlying truth is that it does not come cheap! To be honest, there are very few people who can afford to pay for home renovations out of their pocket. There are two options. You can either drain all of your savings to renovate your house or you can go ahead and take a loan. The wise decision would be to take a loan. Homeowners have many options to select from. You can either borrow money through a cash-out refinance or you can go for a simple renovation loan. Before you decide which option is good for you, you need to have a fair idea of what the two are and how they are different. Most people use the two terms synonymously which is wrong.

What is a Renovation Loan?

The renovation loan either gives funds or gives credit to homeowners to make desirable or necessary changes to their homes. A very important thing to realize here is that it is not necessary that your house NEEDS a renovation to be done. You can even get a loan if you don't NEED but WANT to get renovations around the house. Cool, right?

There are many different types of renovation loans that you can take. They vary from personal loans to loans sponsored by the government. Which option you go for depends on the location of your house, credit situation and how far along you have paid your mortgage. Some of the best options to choose from are discussed below.

Fannie Mae Home Style – Good Credit History

If you have a history of good credit, you are in for a treat! The Fannie Mae Home Style loan gives you the flexibility of structuring your mortgage into a 15 or 30-year package. All the renovations you plan to do are included in this one loan.

The amount of the loan is calculated by checking how much your home will cost after renovations. That is the after-value of your home once the renovations are done.

FHA 203(k) – Not A Good Credit History

There are very few people who have a very strong credit history. For most of the borrowers, FHA 203(k) is the option to go for. In this loan, you have two options. You can get the Streamline Options of the Full Loan Options.

In the first option, you are given a smaller amount to cover for minor repairs. In the Full Loan Option, you are given a lump sum amount up-front for the major repairs. If your credit is not perfect, you should go for this option. Moreover, if you don't mind a little additional fee upfront as the principal, this should be your go-to option.

 EZ “C" conventional – Loan for Everyone

This is structured just like your normal loan. If your renovations will add value to the house over time, you can go for this loan. The roll pre-planned renovations that are value-adding into the loan you have originally taken.

What is Cash Out Refinance?

Another loan option homeowners can make use of is cash out refinance. It is different from the other renovation loans. In this, the homeowners can cash in on the amount of equity they have put in their property.  There is a simple difference between the two.

In traditional refinancing, the loan replaces the mortgage you have on the house with the same amount.

In cash-out refinancing, you can replace the mortgage on your home with a much larger loan than the original amount of mortgage.

Confused? Don’t be. It works like this; you use the cash by taking advantage of the equity of your home. A homeowner borrows more than what he/she owns in the mortgage. The difference is paid in cash to the homeowner. The old mortgage is paid with a new one.

Which One Should You Pick– Renovation Loan or Cash-Out Refinance?

Technically, cash-out refinance looks like a better option. This is not the case. In reality, we can't pinpoint one method as being better than the other. Your credit history and the type of renovations to be done majorly affect the decision of which loan you should go for.

Renovation Loans give the homeowner greater borrowing power and offer a low-interest rate. If you have a lot of built-up equity, cash-out refinance is a good choice. On the other hand, if you don't have a lot of equity built up, it might not be an option for you. In this case, renovation loans are for you!

Remodeling a house with savings is not easy. Most people don't have a lot of money to spare and who are we kidding, renovations require a lump sum amount of money in most cases. If you have decided to remodel your home, you have multiple options to choose from. The most sought-after ones are renovation loans and cash-out finance. Depending on your requirements, both are good!