In our recent blog post, "Demolition is not for the Faint of Heart" we touched on one of the biggest considerations homeowners make prior to beginning a remodeling project; whether to occupy the home or find alternate housing during the duration of the project. We also mentioned interest rates were part of the reason our clients were able to remodel in the first place. This sparked a few questions we wanted to help our readers understand and we've teamed up with Money.com to do just that.
When you decide to build a new home or remodel an existing home there are so many financing options it can be a little confusing. In this post, we're going to focus on appraising, financing and insuring your home during a remodel. Depending on how you want to fund your project you may decide you want a construction loan. If you do, it's important to know that there are two types:
Construction-to-Permanent Mortgage (Single-Close)–This loan allows for the borrower to have interest rates locked in at the time of closing, much like a conventional loan. Most commonly selected for residential home builders, this construction loan type allows you to convert the construction of your home into a permanent mortgage, and it is most suitable for people who cannot pay the entirety of the loan after the construction of the home.
Construction Only (Two-Close)–Do you plan to pay off the entire construction costs of your home after it is complete? Then this loan is for you! However, this loan does not come without its own caveats: Not only do you have to qualify and get approved, but you may have to pay closing costs more than once.
That said, if you do a construction only loan then the bank will require the project scope from your remodeling team, an appraisal of the home post construction before they can obtain your approvals and some banks only fund a certain percent of the total value from the post construction appraisal. The piece that most home owners don't realize is how homeowner's insurance works during a construction loan.
Let's say your home is insured at a replacement value of $250,000 and your post construction appraisal comes in at $425,000. The bank will require your insurance premium to be the value of the loan and as a homeowner you may want the premium to reflect the replacement value post construction (each bank may have different requirements). This is often a detail most home owners don't think about before demolition.
That's why we've teamed up with Money.com - they recently did a piece on the top 4 insurance companies for homeowners – what they offer and why it may be beneficial to you.
There are many ways to fund a remodeling project; besides construction loans you could:
Home improvement loans
Home equity lines of credit (HELOCs)
Home equity loans
Credit cards - look for zero interest options from material vendors/suppliers affiliated with your remodel
As Interior Designers this is not our area of expertise but we wanted to share a little bit more about how our client's funded their project. Stay tuned as we dive deeper into the realities of timeframes in an upcoming post because remodeling timeframes are tough and we want to help you enjoy the process.
Note: Fannie Mae isn’t in the business of doing construction loans, so a Construction-to-Permanent Mortgage Loan would always be held in-house. Very few banks offer in-house long term fixed rate financing like you can get on a conventional loan. Conventional loans are typically sold to Fannie Mae and Freddie Mac.
**It's important to partner with your banker on specifics.