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203k Versus Home Equity Loan Remodeling

iStock-1011954050If you're comparing 203k versus home equity loan for your remodeling project, then you're already well-informed. We want to share some information with you in this article so you're even more informed and make the best remodeling decision for your situation.

 

First, if you're not totally familiar with the 203k option, check out this link and short video that explains it: What is the 203k Renovation Loan?

 

Let's see how the FHA 203k compares to the traditional way for financing home improvements: the home equity loan.

 

As you will see, each option has pros and cons. In today's market, equity is hard to come by. While it's not impossible, it's often difficult and can be expensive. Also, a home equity loan usually has a much shorter term - higher monthly payments - than simply using a 203k loan.

 

Based on current interest rates and APR, the 203k loan will cost about $6 a month to your payment for every $1,000 in remodeling costs you finance. For instance, if you finance a $15,000 kitchen remodel into your mortgage you'll add about $90 to your house payment each month. If you paid for that with a 5 year home equity loan, you'll pay a much higher monthly payment.

 

  FHA 203k Home Equity Loan
Equity Requirement Based on after improved value Based on current home equity
Second Lien? No - one mortgage includes home price and remodeling Yes - treated as a second mortgage
Interest Rate Same interest rate as your home loan because it's one mortgage Variable - can be lower or higher than your mortgage rate
Where to Get Loan FHA-approved lenders and banks Banks, credit unions
Length of Loan The same as your mortgage - typically a 30-year loan Variable - ranging from 1-15 years
Covers Other Financial Needs No - just the purchase and renovating of a home Yes - home equity loans can cover debt reduction and other needs

 

 

Certainly a home equity loan has benefits like taking care of other financial needs. If you're planning to roll other debt like paying off a car or medical bills into the loan, then you have more flexibility. Just keep in mind that equity is hard to come by right now. The 203k loan is based on after-improved value of the house, so you're making improvements and paying for them on a reasonable assessment of the investment.

 

 

Download the "Ultimate Guide to Renovation Loans" for an in-depth look at this renovation loan to see if it's right for you.

Ultimate Guide to Renovation Loans

 

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