Once upon a time homeowners could get a home equity line of credit to make home improvements on their house, and make it feel like a new place. But a HELOC is no longer the optimum home improvement loan. The problem is that many homes lack the equity it would take for a bank to lend the homeowner enough money (or credit) to make decent upgrades, improvements or repairs. Also, a HELOC acts as a second mortgage. In today's market of low interest rates and a lot of homeowners refinancing, a second mortgage often presents a problem.
Instead of a HELOC, you have other options for home improvement loans. One of those choices is the FHA 203k. The 203k can be used for a purchase of course, but you can also refinance a house and borrow extra to make improvements like an additional bathroom or kitchen remodel. The 203k uses the after-improved value of the home based on an appraisers report of nearby comparable homes and the value of the improvements you want to make. Once those amounts are hammered out (See what I did there? Hammered...never mind), you get to have your home worked on by professionals.
Wait, it's not a do-it-yourself financing option?
While a home equity line of credit allows you to do the work yourself and your own pace, the FHA 203k does not allow for much DIY work. The basic reason is that too often homeowners have said they'll do the work, and it doesn't get done (or done well) and the predicted value of the house comes in lower, making it a bad loan. Instead, hiring a professional ensures the work will get done and it will be quality work. So if you're set on a DIY home improvement project, then you may want to avoid the 203k as an option. Keep in mind, some of the work may be DIY-eligible, but the general rule is that you'll need a professional. Check out 7 improvements that make a house an FHA 203k candidate to see if your ideas would be covered under the program.
The cost of the FHA 203k depends on the projects of course, but you can generally expect about $6 more per month added to your mortgage payment for every $1,000 you spend on improvements. So a $20,000 kitchen remodel will add about $120 to your mortgage payment. The bonus is that it's one mortgage, one payment, and the interest is tax deductible because of that!
Learn more about home improvement loans like the FHA 203k with "The Ultimate Guide to Home Improvement Loans" at the button below. The short eBook explains home improvement financing in plain English so you can make an informed decision on the housing market.
(house and piggy bank: Flickr user Images of Money)