203k Versus Home Equity Loan Remodeling

iStock-1011954050 If 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.

Tips to Save on Your Homeowner's Insurance

Home insurance premiums can make up a big chunk of the annual expenses of a family. Insurance rates change every year, and in many cases the premiums go up. We all know that there are several variables that determine which banks will lend us money, how much insurance companies will charge us for coverage, and what qualifies a buyer. There are four main variables that may affect your home insurance rate:

Home Maintenance Tips for Winter

Sure, spring cleaning sounds great. However, in reality, tackling a long home maintenance checklist all at once can be overwhelming. Rather than letting it all add up, what if you tackled home maintenance a little each season? Here are some ideas for taking care of your home during the winter months.

Tips for Paying Off Your Mortgage Faster

There are several ways to pay off your mortgage faster and save on interest payments. Even better, not all methods require spending a lot of extra money! Take a look at the list below: Make extra principal payments. You can pay extra money toward your mortgage balance each month or make a larger, lump sum payment on your principal each year. This reduces the amount due on the mortgage as well as reducing the amount of interest that will accrue. Extra money can also be added to the principal payment from bonuses, gifts, savings and extra earnings. Just remember to make a note on the check for the money to go towards the principal! Make one extra mortgage payment per year. One of the easiest ways to make an extra payment each year is to pay half your mortgage payment every other week instead of paying the full amount once a month, otherwise known as “bi-weekly payments.” With these payments, an extra payment is made so that the total number of payments that one makes adds up to 13 payments in a year rather than the 12 that would have been made with monthly payments. This adds up to significant interest savings over the duration of a mortgage. You also want to make sure that if your lender accepts this kind of payment they will not charge you a prepayment penalty. Also verify that the bi-weekly payments are being applied to the principal amount and not the interest. Otherwise, you won't notice the savings. Reduce your balance with a lump-sum payment. Have you inherited money, earned a bonus or commission, or sold a large item? You could apply that amount to your mortgage’s principal balance. Another option is any time you have a month where you have that third paycheck, apply that to the principal on your mortgage. This will happen twice a year, adding an extra principal payment to your mortgage loan. While paying down a large debt is nice, it's not a requirement. Consider making sure you have enough to work toward other financial goals, such as an emergency fund, before paying more on your mortgage. However, there are many options you can explore that best fit your budget. You can learn more about buying your first home with our Get Mortgage Ready Guide below.