New type of home equity loan caters to major renovation projects

Brandon Segal was set to make a substantial addition to his historic house in a Philadelphia suburb, but he wasn’t sure how to pay for it.

He didn’t have enough equity to cover the six-figure renovation bill with a home equity line of credit or a cash-out refinance. A construction loan struck Segal as complicated and cumbersome.

Segal settled on a home equity loan through RenoFi, a financial technology company that connects homeowners with credit unions willing to loan based on how much a house will be worth after upgrades are completed.

“I like the ability to borrow based on what my appraised value is going to be,” Segal says.

RenoFi served as a matchmaker, directing Segal to Ardent Credit Union, a Philadelphia lender. He took a 20-year, fixed-rate loan to pay for a two-story addition to his 1920s home.

Home improvement takes off during the pandemic

The coronavirus pandemic has turned home improvement into a national pastime. In one illustration of that trend, the National Association of Home Builders’ remodeling index soared during the pandemic. Home-improvement retailers and remodeling contractors reported spikes in business.

With many Americans working from their home offices, more homeowners have developed a hankering for upgrades to their spaces. Meanwhile, a spike in home prices and a shortage of homes for sale limits the choices available to those who’d traditionally be move-up buyers.

The national median price of homes sold by Realtors spiked 12.9 percent from December 2019 to December 2020. Housing inventory fell to a record low, according to the National Association of Realtors.

Segal, for his part, loves the house he shares with his wife and their three daughters, but the quarters were getting cramped. He found a contractor to add a master bedroom and other living space to the house.

Paying for home improvements can pose a challenge, however. A home equity line of credit (HELOC) is one tried-and-true source of renovation funds. But HELOCs work only for homeowners with significant equity. If you owe $300,000 on your $400,000 property, a bank is unlikely to lend $100,000 through a HELOC. To keep your loan-to-equity level at 80 percent, or $320,000, you’d be able to borrow just $20,000.

RenoFi offers a different approach: Homeowners can borrow up to 90 percent of their home’s after-renovation value.

The company has partnered with credit unions throughout the country to offer the loans, says Justin Goldman, founder and chief executive of RenoFi. Goldman launched the company after experiencing firsthand the challenges of paying for renovations on an older home.

He created RenoFi to fill what he sees as a gap in the market. Goldman found most lenders didn’t offer after-renovation loans, so he began persuading credit unions to add RenoFi home equity loans to their offerings.

How RenoFi loans work

RenoFi loans are second mortgages. In one example, Ardent Credit Union offers 20-year loans at a fixed rate of 4.25 percent, Goldman says. That’s higher than the rate on a primary mortgage, but it includes the flexibility of allowing homeowners to borrow against yet-to-be-created value.

Borrowers pay for an appraisal that establishes the home’s value after renovation. The appraiser looks at the proposed construction plan and determines by how much the work will boost the property’s market value.

The typical RenoFi customer borrows $150,000, Goldman says. At that amount, a 20-year loan with a 4.25 percent interest rate carries a monthly payment of $929.

Goldman says RenoFi’s loans also appeal to homeowners who recently locked in loans at rock-bottom levels and don’t want to do a cash-out refinance to pay for improvements.

“If you’ve taken advantage of a low rate and refinanced, you’re going to have to pay all those closing costs again,” Goldman says.

That situation applied to Segal, the Philadelphia-area homeowner. He had recently refinanced and didn’t want to do so again.

“We have a great rate on our current mortgage, and we didn’t want to touch that,” he says.

To land a RenoFi loan, the borrower pays for the after-renovation appraisal, which typically costs $100 to $200 more than a standard appraisal, Goldman says. Beyond that, closing costs typically range between $95 and $500.

“Credit unions’ closing costs are typically lower than a traditional bank, so in the end, it’s still cheaper for the homeowner,” Goldman says.

Other ways to pay for home improvements

RenoFi’s loans are one of several options for homeowners looking to renovate. Among the others:

  • Home equity lines of credit. HELOCs come with one significant caveat: To borrow against your house, you must have plenty of home equity. Before considering a HELOC, make sure the value of your home is significantly higher than the amount you still owe on your mortgage. HELOCs usually close quickly and carry variable interest rates.
  • Home equity loans. Essentially a second mortgage, a home equity loan comes with a fixed interest rate. As with a HELOC, you’ll need sufficient equity.
  • FHA 203(k) loans. This type of loan lets you borrow against the value of the home after improvements. FHA loans are lenient about down payments and credit scores, but they charge higher mortgage insurance fees than other types of loans.
  • Cash-out refinance. In this scenario, you borrow more than you owe on your existing mortgage and apply the proceeds to renovations. This requires equity in your home.
  • Construction loan. A home construction loan is a short-term, higher-interest loan that provides the cash to pay the contractors. The property owner typically needs a longer-term mortgage after the work is completed.
  • Selling a stake in your home. A new breed of financial technology firms is pitching American homeowners on a different way of tapping into home equity. If you’re sitting on a pile of it, these companies — including Haus, Hometap, Noah, Point and Unison — will buy a piece of your house. You repay the “co-investment” when you sell. One downside: This money comes at a higher cost than a mortgage or HELOC.

How to finance home renovation: extra cash sources for exterior remodeling

If you still don’t know how to finance home renovation projects, there are a few risk-free ways to obtain extra funds. One of them is applying for a personal loan. Thus, you can cope with financial strain and deal with an emergency or planned home repairs, achieving the home’s exterior of your dreams.

Many homeowners are interested in carrying out major repairs or upgrading property’s exterior but do not have enough financial resources and home improvement costs to implement such huge projects like installing a new roof, siding, or windows. Of course, it can be a planned home renovation. However, mostly, some unforeseen and unexpected damages can hit your wallet hard. So, you have to seek some additional funds to cope with the expensive job of installers. And even if you have some savings or can borrow money from your relatives, it’s hard to predict all details and nuances and, more likely, in the process of executing various repairs, some additional material or labor costs may be needed. Thus, it is possible to obtain extra cash and qualify for an exterior upgrade loan to deal with urgent costs right away without waiting any longer.

Extra financial sources for your home renovation project

In the events when siding, roof, or window replacement is of high importance, you can apply for a personal loan through the reliable services of competent lenders. And while you may think that this is a risky path with hidden traps and fees, usually, it is an achievable goal to cooperate with honest creditors who offer quite affordable terms and conditions. Here are a few benefits why obtaining a personal loan may be a great idea when it comes to financing new replacement windows, a durable roofing system, or beautiful and long-lasting cladding:

  • no need to explain the purpose of the borrowed funds;
  • in the case of an unsecured loan, also no need to provide collateral or look for guarantors;
  • you can apply online and since the eligibility criteria are soft, it allows to successfully qualify and receive the money within a few hours;
  • a loan allows you to make repairs more quickly without saving on materials than if you were collecting money for it on your own;
  • obtaining additional funding, you will be able to invest in superior quality, avoiding poor remodeling;
  • upgrading exterior, you will increase the value of the property in the events of its resale;
  • some renovations, for example, replacing old cracked cladding, will promote the comfort and boost energy efficiency;
  • the terms of a personal loan are flexible enough, so you can use it for both small repairs and for larger projects.

How to finance home renovation wisely using lending services

Before applying for a loan to cover new cladding expenses or roof replacement costs, analyze your income and financial liabilities, and calculate whether you can make the necessary payments every month. If you are determined to take out a loan, first, find out all available options. The maximum lending amount depends on many factors, like your employment or stable source of income. At the same time, there are reasons why both banks and online lenders may deny your application: insufficient monthly income or you have little work experience and often change jobs. Bad credit history can also become an obstacle to getting money. Thus, analyze all types of credit: secured and unsecured, fixed and variable rates, payday instant loans, etc. Each of them has its advantages and drawbacks. Never apply blindly to avoid getting into an unpleasant trap.