Before you swing the hammer, hammer out the finances
Home inventory is tight across the country, so many homeowners are deciding to keep the home they have and update it. But one common mistake people make in the renovation process begins before the first hammer falls—they only think about doing the renovation but not necessarily about the financial implications.
They might have the new kitchen all planned out, the perfect backsplash in mind, and might start the work with a specific budget. But, life happens and two weeks into the work, just when they’re about to drop $5,000 on new appliances, the family car goes into the shop. And it’s going to cost a bundle. Worst of all, the home may not qualify for a standard mortgage because they can’t get an appraisal on unfinished construction—and no appraisal means no extra financing.
Moral of the story? Before you start the work, explore your financing options.
Refinance with a renovation loan
A great way to make sure you stay on budget is to refinance your existing mortgage including renovations into one new loan. This type of loan is based on the post-renovation value of the home, as if the renovations have already been finished.
The Fixed Cost Contract
To make sure the renovations are completed within your budget, a Fixed Cost Contract (FCC) is a requirement of a renovation loan. It’s an agreement with the contractor that mitigates risk. In other words, a renovation loan ensures the work gets done on time and on budget. A contingency reserve of 10-20% is also included in case of any unidentified needed repairs during the course of construction.
When’s the best time to renovate?
Don’t assume that you need to wait until spring to start the renovation process. While spring may be the traditional period when the housing market begins to heat up, renovations begin year-round. After all, if you want to redo the kitchen or finish the basement, it may not matter what the winter weather’s like outside.
If you are doing a project that’s going to include outside work in an area of the country that has inclement winter months (adding a bedroom or extending a porch, for example), you have the opportunity to start the loan process in the fall and use the winter months to find the right contractor for when the weather breaks. And with April through June being the busiest times for contractors, it’s nice to be able to get them in the books earlier.
Look into the crystal ball
The first step to take when thinking about a renovation loan is the easiest (and least expensive): find yourself a great renovation loan expert. A renovation specialist is experienced enough to understand all the things that can pop up during a renovation and can do wonders when it comes to making the process run smoothly.
Remember, it’s nice to dream about the perfect improvement to your home. But it’s much nicer to get the financing down first and avoid problem scenarios later!
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate Affinity for current rates and for more information.