Financing Your Remodel: What are the Options? | HTH 009
back to another episode of the How to Home podcast. My name is Aaron Massey.
Joining me, as always, is Tracy Pendergast.
we’ve got Javier Ruiz with us, who is a mortgage banker, and we are talking
today about financing a remodel. It costs a lot of money to make changes to
your home, but everybody wants to make some level of changes.
you very much for being here. I’m excited to kind of learn some of these
options and hopefully present it in a way to people that is not too technical,
that they can feel confident that they walk away with some good knowledge.
How’d you get involved in, I guess, residential lending or whatever you would
call it, and what’s your experience level?
I started my career many, many years ago. I’ve been in the real estate and
mortgage industry for about 30 years now. For the last eight years, I’ve been
with a company by the name of New American Funding, which is a direct lender
for one of the top lenders in the nation.
you know what you’re talking about.
little bit, yeah. Yeah. We do a lot of loans. Our company funds just about a
billion dollars a month.
take that income.
only for my renovation.
like four homes in L.A.
you buy a home, not only is the initial purchase a huge commitment, but if you
want to make changes and renovations along the way, it’s going to be expensive.
Certainly now, materials have never been more expensive. You’re hiring
contractors. It’s expensive. You’re getting plans involved, permits and
everything. There’s a lot of money that’s involved.
cheap, personally, so that’s why I do a lot of the work myself. But for some
people, that’s not an option. For others, they don’t have the cash on hand, so
they’ve got to take on additional ways or find creative ways to pay for the
changes they want to make over time. That’s what we’re going to dive into
we get into that, I just want to remind you guys that our voice mailbox is
always open. You can give us a call at 978-709-1040. The show is driven by your
suggestions and your questions. We want to make sure that you’re involved as
much as possible, so please call in and leave us a voicemail, or you can hit us
up on social media at the links in the show notes.
and as always, we want to thank our sponsor, Filterbuy. They are an HVAC filter
provider. You can save 5% when you subscribe. Obviously, filters are really
important. They cut energy costs and they prolong the life of your units.
They’re very important to us right now as we do our remodel. They’re keeping the
air nice and clean for us and the kids.
we get started and dive into all the information you’re going to provide us
with, I pulled up some fast facts. According to Home Advisor, the average
kitchen remodel in the U.S. ranges from 12,000 to 30,000. That’s around $150
per square foot. The average cost of a bathroom remodeling project is
approximately 10,000, and that’s a minor, partial, or small bathroom.
a big luxury master suite.
A landscaping project can cost anywhere from 5,000 to over $100,000.
can get very expensive, yes.
really is. These things add up, and not everyone has the cash on hand to do
these. Excited to talk about options.
I mean, who’s got a hundred grand on hand to spend on their landscape and pay
it forward in cash? I mean, it does.
adds up quick.
your flowers die, what kind of hole in the earth do you crawl into and cry in?
Because that is insane.
when you didn’t water them enough, or your sprinklers got screwed up.
a previous episode, we talked to a realtor about the best places to spend the
money on your home as far as maximizing your return on investment. But we
didn’t talk about ways to actually pay for it and where you can find the money.
As a mortgage banking professional, I thought you could come in, share some
great tips with us.
is several different loan products that are available for homeowners, existing
homeowners and potential and new homeowners, when it comes to renovation. On a
existing homeowner, what really is important is to find out what the value of
the property is currently and what they owe on their current mortgage. The
difference between the two is where you can really take advantage of maybe
pulling out some of that equity in cash and being able to finance the home
would say always adding square footage to your property would add the most
value to your property, future value to your property. But as far as the
financing options that are out there, there’s always a cash-out refinance
option. It’s always a little pricier than maybe just regular rate and term
financing, because you’re pulling out cash, but it all depends, again, the
difference between what you owe on your home and what the value of your home
someone who doesn’t know, what is refinancing?
is getting a new loan that pays off your existing loan. If somebody owes
$100,000 on their home, and the value of their home is 200,000, and they need
an extra 50,000, so the new loan would be 150,000. That would be a cash-out
extra 50,000 they could then use towards whatever improvements they’re planning
to make and pay their contractors and everything else.
are the pros of refinancing?
the pros of refinancing without using a renovation-style loan product is the
liberty to spend the money the way you want to spend it. If you want to do it
yourself and save money without hiring a contractor on maybe more cosmetic
items, then that would be probably the best way to go, because there’s a lot of
homeowners out there that’d rather do it themselves and are handy and can save
a lot of money.
far as the drawbacks of a cash-out refi? I know interest rates now are
significantly higher than when I bought my house, for example.
I did that, would I then be stuck with this new interest, like the fed interest
rate is now?
would. You would. Whatever the current rate is is where you would have to
settle on that interest rate. If it’s higher than what you currently have on
your first mortgage, then that’s a decision that you would have to make.
example, I signed a 30-year mortgage initially. I’ve only been in the house for
four years. I still kind of have 26 years on the initial loan, but it has a
good interest rate. If I took on this cash-out refi at whatever couple more
percent, then over that life that’s a significant jump, right?
is a significant jump over the life of the loan, but it all depends how long
you’re going to be in the home, also. If you plan on maybe selling it, maybe
being there for five, 10 years, you may not have to pay that whole-
amount back. But because of maybe the recasting of the amortization of the
loan, which means you’re spreading-
what’s that mean?
you’re now spreading out what … You have a 26-year term on it left?
going back to 30, so the difference in the payment-
may not be that much different.
because it’s spreading it out wider.
spreading it out more, and so your payment may not increase that much. Even
though your interest rate is increasing, your payment may not increase that
much if you pull out of a certain amount of cash, and if you keep the loan
balance within a certain range.
I’m not going to be afraid to ask dumb questions today.
maybe there’s someone else that doesn’t understand.
you are refinancing, do you have to specify what you’re going to spend that
money for? Or are they just giving you that money and you can spend it on
whatever you want and you’re just paying it back? Would I have to say, “I
want to refinance because I am putting this money back into my kitchen,”
and everything has to go back into the kitchen?
depends with certain lenders, but with us, we usually do not ask the reason
why, depending, again, on the loan to value.
you want to take a vacation, pay for college, your son’s college tuition,
remodel the home, do a room addition, that’s really all up to the homeowner.
a Hot Dog on a Stick.
a Hot Dog on a Stick?
buy a franchise of Hot Dog on a Stick. Okay, good. Got it.
so that is kind of the basics. I feel like we’ve kind of touched on the basics
of a cash-out refi.
kind of the basics of that. That might be an attractive example or an
attractive option for somebody who’s been in their home for a little bit of
time, who’s built up some equity, and just wants to use the money however they
choose towards their remodel and spread out the new loan.
drawbacks being that if you’re spreading out over a higher interest rate. What
other options? You mentioned talking about some more remodel-focused loan
options. What are those options?
a Fannie Mae product by the name of HomeStyle. It’s a renovation loan that
allows you to use the maximum equity in your home to be able to add a cash-out
and/or purchase a property and use that money to renovate the home.
this would be the type of loan where you need to use a contractor. Am I
would need to use a contractor, yes.
would need to use a contractor, but there’s also a government loan where you
can increase the loan to value and take it all the way up to 97.75 of the
that down for me. When you say loan to value, what are you describing?
balance versus value of the property.
appraised value of the home-
versus what your loan-
going to keep going back and repeating stuff to make sure … Because if I get
to a point where I understand, most people can understand.
would be the type of loan for someone who is currently buying a house or this
is another option for a homeowner that’s looking for a loan. It’s just a
different type of loan.
a different type of loan, and it gives you the flexibility of really increasing
the amount of loan that you can put against the property.
The pros would be what?
pros would be that you are increasing the value of the home, and you’re getting
a new loan amount based on the new value or the completed value of the loan,
the new appraised value.
Then the cons are you don’t have as much flexibility with doing it yourself.
the Fannie Mae HomeStyle, you do have that flexibility, and one of the key
things is that you can add luxury items. You can add a pool. You can add an
outdoor kitchen. You can add different things that maybe the government loan
does not allow you to do.
a little more liberal loan that way. You can do it yourself. But it does
require a contractor.
maybe people who aren’t familiar with Fannie Mae or Freddie Mac or whatever,
you might have heard about them during the financial crisis or the housing
crisis back in 2008, but it’s been a while. They’re giant government-backed
entities, essentially, that buy up all these mortgages.
think when I first bought my home, I was a little bit surprised how many times
my mortgage changed hands. I bought it through one lender initially, and then I
get a letter in the mail a few months later and it said now my mortgage is now
owned by a different bank.
happened to us, too.
now it’s all owned by a different bank. Every couple months, you seem to get
one. You don’t really realize that, I think, as a first-time home buyer, how
many times your mortgage kind of changes hands. I think Fannie Mae, correct me
if I’m wrong, is a company that oversees all that, buys up the majority of
mortgages in the country. Is that correct?
they are the biggest mortgage holder in the nation, and we sell our loans to
them but retain the servicing.
so you guys still do the legwork. As a homeowner, my mortgage payment
technically still goes through you.
you guys actually service the loan, but it may be owned by … I watched The
Big Short. I’ve seen the movie. I like it.
confusing. But okay. What are other types of options out there?
is a home equity line of credit that you can access, and it usually is a second
mortgage on your home, and it depends on the bank that you work with. We have a
few options where you can amortize that payment over 30 years. The rate on that
is a little bit higher than it would be on your first mortgage, because it is a
second mortgage. But again, it gives you the flexibility of being able to
access equity in your home and pull out cash to be able to do a home project.
you’re going to do maybe like a kitchen remodel, where you may not have or need
a contractor to do it, where you can handle some of the trades, you can manage
that job and get it done maybe cheaper. But it gives you that flexibility of
making that decision yourself as a homeowner.
that a more attractive loan maybe for somebody who plans to pay it off in a
shorter term? Say I’m going to remodel my kitchen, and I need an extra $20,000
to do it, and I’m going to do a lot of the work myself. Would that be a home
equity line of credit, as opposed to going against a cash-out refi, since it’s a
smaller loan amount that I would need, the 20,000?
would think that maybe a home equity line of credit would probably be-
be a better-
the better fit for that.
more attractive for the homeowner, definitely.
would have a higher interest rate, but because it’s a lower loan amount and
stuff, you could potentially pay it off a little bit faster.
yes. Or access even more of the line of credit, if you need more money to do
a home equity line of credit is a second mortgage.
is a second mortgage against your home, yes.
most affordable rate’s going to be through a bank or a mortgage company to be
able to save the money on the interest rate and the costs of the loan, versus
going credit cards or unsecured lines of credit. A secured line of credit,
which is a home equity line of credit, would probably be your best bet on
smaller projects. But if you’re going to do room additions, where you’re going
to do construction to the property, with permits and fees, I would definitely
maybe consider more a cash-out refi or maybe one of these renovation-style
renovation-style loans are usually more for purchasing a property that needs
upgrades, and some upgrades may be either maybe updating a property or major
renovation. It gives the borrower the flexibility of not having to look for the
most beautiful house on the block. They could buy something that needs a lot of
work, and maybe there’s already current equity in the property because of the
fact that it’s not fully remodeled. It gives that borrower that flexibility,
where maybe they can literally purchase some equity by getting this type of
at New American Funding do a lot of them. Back when there was a lot of bank
home REOs that properties were damaged when the previous homeowner were there,
we did a lot of these 203(k) FHA loans for first-time buyers. They literally
came in with 3.5% down payment and were able to finance, say, 20, 30, 40,
$50,000 in a remodel.
think that’s an amazing option.
mean, to me, I didn’t know that was a thing, because for me, when I bought my
home, it was in significant disrepair, and I ended up doing a … Because the
seller wanted us to have the home, I ended up doing a seller-financed,
actually, which is a little bit different, which is where the seller …
Correct me if I’m wrong, but the seller still holds the mortgage on the home,
and you’re kind of paying rent. It’s like a rent-to-own, in a way. Then as I
built the equity kind of into it, then I was able to then refi later on.
by the sounds of what you’re saying, I may have qualified for one of those
types of loans, where this house needed a lot of work, and I could have
potentially borrowed $50,000 in addition to … Because from my experience, a
bank doesn’t really want to give you any more money than what the house is
currently appraised at.
based on your down payment.
Well, this would keep your down payment at a minimum and be able to access
additional funds for the remodel.
I never knew that existed, and that would have been certainly attractive to me
at that time.
I paid additional interest on the seller-financed thing for a couple years
while I kind of-
the government loan, there is two types of 203(k)s.
is a 203(k)?
the name of that loan?
is the name of the loan product.
is a limited and then there is a full. The limited allows you up to 35,000 in
additional financing, and it doesn’t allow you to do structural, but it’ll
allow you to do a lot of cosmetic work. That one does not require you to have a
consultant, a third-party consultant. Really, you can get the work done yourself
and have 35,000 available when you purchase the home.
is obviously an overwhelming amount of information, and there are a lot of
options. Where does someone start with finding out what they’re eligible for
and then deciding what the best route is?
it all depends on the property and the borrower, and if they’re buying a home
or if they’re already in the home. It all depends on their financial situation.
But obviously, a great loan officer that is experienced in this type of …
It’s kind of a niche product, would be great to get in contact with. I would
definitely recommend any home buyer or borrower that’s interested in accessing
their equity to contact a trusted home mortgage advisor or loan officer, and
they can call us, right, and we can advise them and look at their options on
what’s best for them.
think the average person might start with somebody who … Maybe a first-time buyer,
they’re going to be like, “I don’t know, I guess I should go to a bank for
what I would have assumed, for sure.
Maybe that’s not the best place to start, because they have different mortgage
officers and all that stuff, right? Should a homeowner just Google mortgage
banker? What should they look for?
Money, please. Yeah.
I would definitely Google maybe something like construction loans, renovation
financing. Renovation financing would give you a lot of options when you Google
it, because it will bring up some of the loans that we discussed. If you go to
your bank, they’re probably going to offer a home equity line of credit,
because that’s probably the easiest for them, especially if they hold the first
like I said, there’s various options for the homeowner. It’s just getting in
contact with the mortgage professional that they can see their personal
situation, and see when they purchased, what the value of the property is, as
we discussed earlier today. It just depends on each different case.
there any other types of loans off the top of your head that you can think of
that might fit this type of thing, where somebody wants to finance? Are those
kind of the four major ones I think we’ve touched on? Cash-out refi. We’ve
touched on the home equity line of credit. We’ve touched on the government-backed-
203(k). What was the other one we touched on?
Fannie Mae HomeStyle.
haven’t talked about credit cards. That’s another-
feel like credit cards … I think you touched on it. I mean, what you’re
really dealing with in credit cards is very high interest rates that you have
to pay off very quickly, right? I mean, you’ve got credit card interest rates
that could be as much as 25.99%, versus a home equity line of credit which
might be 6% or 7%. Is that accurate?
What we did for our last home for our kitchen, which is very different from
what we’re doing this time, is we went to Lowe’s. We got the credit card,
because with the credit card you get zero interest for however many months, and
then we just paid it off in two big sections and wrapped it up.
think that works fine. I mean, certainly, for new appliances, for example, if
you’re spending $5,000, $6,000 on new appliances, or you’re just updating
certain things. But it’s a hard pill to swallow, I think, if you’re spending
$50,000 or something on a full kitchen renovation. I don’t know that most
people can do that, because you’re not going to be able to pay that back,
really … Well, some people might be able to, but that’s a lot of money to pay
back in a short term where you can take advantage of that zero interest window.
What traps do you think people fall into when they’re doing something like this?
think maybe getting unsecured financing would be the trap.
me interrupt you real quick.
you say secured financing or unsecured financing, what you’re saying is secured
financing uses the home as collateral, essentially.
you default on the loan, meaning you don’t pay your bills, the lender, whoever
has the mortgage, can put you into foreclosure and take possession of the
property. Is that the gist of it?
yes. Yes. Unsecured would be more like credit cards or an unsecured personal
hear some things like advertisements on the radio, for example, where a company
will advertise, a contractor will advertise, solar installation for the roof,
we’re going to come in and do solar on your house, and zero percent interest
for 36 months, or 24 months. Are people who go that route … Are they asking
for problems? Are those usually-
a lien against your house, yes. It’s a lien against your property, yes.
Sometimes there’s different types of solar programs out there. I’m not very,
very familiar with them, but we deal with them when we are refinancing a client
and we see the solar lien on there. That could be a whole different [crosstalk
putting risk … There’s high risk associated with signing onto something like
that, is what you’re saying.
it’s a lien against your property, so then if something happens and you miss a
payment or two, you can basically be in default to the contractor.
depending on the terms of the lien or the lease, or however they’re
securitizing their solar equipment.
I mean, I would take it with a grain of salt when you’re listening to stuff on
the radio like that. Make sure you’re doing your research-
and evaluating that before you pull the trigger on some of those kind of
things. Make sure you find a mortgage banker or lender in your area that you
can discuss options with before you sign on the dotted line.
based on my own experience and I think some stuff that I’ve read out there,
pretty much every remodel that I’ve done and that I think most people do seems
to go over budget for any multitude of reasons. Do you recommend that people
maybe take on a loan that’s a little bit larger than their remodel cost is
anticipated to be?
would say yes, a little larger loan with some extra cash would give you more
flexibility, as things always come up that may change the budget for construction
or a remodel. Yeah, I would think so.
change you make in a remodel is going to add a level of cost.
we’ve already discovered probably three things in two days. There’s termite
damage. There’s pipes that need to be changed and closed up, and repairs to
subfloor, everything, so-
I think if you take on … You have an estimate or thing that’s going to be
25,000, and you go and you get 25,000, and you run into those hurdles, well, by
the time the contractor … Once the contractor starts the work, he’s got to
finish the work. Maybe you’d be better off taking 30,000, 35,000.
couple of these loan products require a contingency part, which is usually 10%
yeah, so that would make sense.
also talked in many episodes about prioritizing your home projects. I think
this is one situation where if you don’t have the cash on hand to do your
project, maybe doing a small area at a time, not being too unrealistic about
what you can do with the money that you have.
our home, we kind of have the cash in the envelope mentality. If we don’t have
the money to pay for our project, we just don’t do it. That’s just how we
function. There’s just not those huge concerns.
mean, ultimately, that’s the safest route.
the best way.
the best way, but it’s not always possible, given the amount of work you need.
Sometimes stuff just happens that maybe you don’t have the emergency fund for
or your homeowner’s insurance doesn’t cover it, or something, there’s some kind
of damage and you’re left high and dry, and you’ve got to take on something.
mean, for us, we went two full years without doing literally a thing to the
inside of our house to save for what we’re doing now. We never even painted the
interior. We just kept waiting, waiting, waiting. That doesn’t work for
everyone, because some living situations aren’t livable and aren’t comfortable.
to rehash, let’s just quickly list out … We talked on six different ways, I
think, or seven different ways to finance your remodel or renovation. Cash-out
refi. HomeStyle Fannie Mae. Home equity line of credit. 203(k). Personal loan
or unsecured financing. Credit cards.
I missing anything else?
in an envelope.
in an envelope.
in an envelope. Cash is king. But sometimes you’ve got to go a different
direction. Well, I hope that this was super helpful to the audience to at least
get their brain churning and share some knowledge that there are options out
there for financing your remodel that maybe you weren’t aware of before. You
always want to do your research, of course, and we’ve only just touched on it,
and there’s all sorts of levels of fine print, I think, with each one of these.
sure you approach somebody like yourself wherever you live and find a mortgage
banker or mortgage lender that is going to give you the best and most current
Javier, this has been super enlightening for me. I wish I had had a discussion
with you a couple years ago and explored this 203(k) thing that I had never
heard of before. I’m glad that there’s people like you out there to talk to
that can make sense of it, because it’s definitely a very technical world and
always changing. Mortgage rates are always going in and out. Having somebody
like you that you trust that can give you the most relevant information is
knowing you have options, too.
I would explore a lot of different options depending on the project that you
want to do, or what your goal is, and how long you’re going to be in the home,
and whether you’re purchasing or whether you’re already a homeowner, existing
somebody wants to get in touch with you or get a little bit more information
about some of the options that are out there, how do they reach you?
thank you so much for being here. I know I learned a ton.
want to encourage you guys once again to call in with your suggestions and
questions. The show doesn’t run without you, so please do that. Our number is
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you for being here.
you, Aaron. Thank you, Tracy.
you so much.
was so great.
right. We’ll see you guys next time.
How to Home podcast is brought to you by Filterbuy.com, your one-stop,
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collaboration by Mast Media Group LLC and Intelligent Arts + Artists. The show
is executive produced by George Ruiz and Aaron Massey.
This week, Javier Ruiz from New American Funding joins Aaron and Tracy to discuss all you need to know about financing a home remodel. We talk about cost estimation, how to decide the best financing options for you and which rooms will hit your budget the hardest.
You can always call and leave your questions and comments on our voicemail!
- According to HomeAdvisor, the average kitchen remodel in the US ranges from $12,000 – $30,000 or around $150 per sq. ft
- To hire a handyman the average cost is $390 ph
- The average cost of a bathroom remodeling project is approximately $10,000, although this includes minor, partial, and small bathroom remodeling costs. A comprehensive bathroom remodel is likely to cost $15,000 or more; a large master bath remodel can easily go over $50,000.
- Most people planning a house upgrade aren’t doing it in order to put a “For Sale” sign in the yard. In fact, only seven percent of homeowners are renovating to prepare their homes to be sold, the lowest percentage since 2015. (marketwatch)
- The majority of homeowners (62 percent) plan to pay for projects, at least in part, by using savings. Other home improvement financing options include credit cards, 30 percent of homeowners say they’ll pay for a project using plastic. While credit cards are also a popular option for millennial homeowners, it is significantly less so than last year, down 16 percent.
- Payment example: Monthly payments for a $25,000 loan at 7.99% APR with a term of 12 years would result in 144 monthly payments of $270.48. (lightstream)
- A landscaping project can cost anywhere from $5,000 to over $100,000. When deciding on a budget keep in mind that investing in professional landscaping will greatly add to the value of your home. A general rule of thumb is to spend 10% of your home’s value on landscaping.
- Find out what the value of your home is currently, and what you owe, to get a good idea of what you can get financially.
- Cash out refinance option can be a little pricier.
- Refinancing is getting a new loan that pays off your existing loan.
- Pro of refinancing is the liberty to spend the money the way you want.
- A drawback is rising interest rates.
- There’s a Fannie Mae financing option called Home Style- it’s a renovation loan that allows you to use the maximum value of your home to purchase and/or renovate a home. https://www.fanniemae.com/singlefamily/homestyle-renovation
- Pros: You’re increasing the value of the loan. You can add luxury items.
- Home equity line of credit is another option. The rate is a bit higher but gives you the flexibility to access equity in your home.
- Good for a small project where you can pay it off quickly.
- Your most affordable rate will be through a bank or mortgage company vs. a credit card or in-secure line of credit.
- Find a trusted loan officer who’s experienced in home loans.
- The bank isn’t necessarily the best place to start. Googling “construction loans” or “renovation financing” is a great place to start.
- Credit cards have very high interest rates.
- If a loan is going to create financial stress, consider splitting your remodel into smaller projects.
TO RECAP OPTIONS-
- Cash-out refinancing.
- Fannie Mae, Homestyle.
- Home equity loan
- Unsecured loans
- Credit cards
HOLLER AT JAVIER:
Email | [email protected]
Website | https://www.newamericanfunding.com
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