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.

Holiday gifts to spark home improvement ideas

People have spent more time at home in 2020 than they likely have in years past. This has provided homeowners with plenty of time to ponder potential upgrades to their homes. After taking inventory of their lifestyles, surroundings and furnishings, people have embarked on construction projects or home interior design renovations in record numbers.

Holiday gifts that cater to projects around the house are likely to be highly valued this holiday season. Here are some ideas for home improvement-related gifts.

Home improvement retailer gift card

Home improvement centers are one-stop shopping for do-it-yourselfers. To help offset the cost of supplies, gift-givers can give a gift card to a neighborhood hardware store.

Magazine subscription

There are plenty of ideas on the internet, but a subscription to a home remodeling or interior design magazine puts inspiration right in homeowners’ hands. Pages can be marked or cut out and used on idea boards.

Tools and supplies

Homeowners just starting out may benefit from the basics. Stores often sell starter tool kits that can be used in home improvement-themed baskets. Experienced DIYers may have a special tool in mind that is outside their budget right now, like a chop saw or cordless power drill. Purchasing one of these items can help projects move along more smoothly.

Expert consultation

Who can’t use a little help with their home remodeling efforts? Give the gift of a consultation from an interior designer or professional contractor to help complete plans that may be a little out of reach for the average DIYer.

Big-ticket item

Some friends and family members may want to pool their resources and offer loved ones an over-the-top gift. This can include a backyard playset for children, a storage shed, a pool installation, or even a new appliance package. Gift ideas are endless and only limited by budget.

Room re-do

All it may take is some new linens or accents to transform a room. From throw pillows to curtains to wall art, give the gift of an easy room makeover.

Riding the momentum of increased home improvement projects from the past several months, holiday shoppers can choose home-related gift ideas to keep the projects and ideas flowing. —Metro Creative Connection

Incorporating home renovations into the ‘new normal’ of homeownership

COVID-19 continues to reshape our lives, changing our daily routines and mandating precautionary measures that involve staying in our homes as often as we can. With people spending more time at home than ever before, home improvement projects are increasingly becoming top of mind for homeowners.

Remodeling home projects take time and patience, and REALTORS® and homeowners alike recognize the feelings of accomplishment, satisfaction and potentially higher home values that come with it. During this pandemic, homeownership is invaluable, and we know that your home means everything to you – from protection, to safety, to comfort – so we’re seeing people across our region dedicating themselves to improving their homes.

Below are some facts about home renovations during the pandemic, according to a survey by the National Association of REALTORS® (NAR):

Despite the financial difficulties brought on by the pandemic, 77 percent of homeowners say their home renovation budget for 2020 is the same or greater than last year. The top three home renovations that homeowners hope to complete within their budgets in 2020 are:

             1. A new bathroom (28 percent)
             2. A new kitchen (23 percent)
             3. Fencing in their yards (21 percent)

Homeowners are attuned to how the pandemic may influence prospective buyers’ preferences. A fenced-in yard, for example, the third most popular project for 2020, didn’t even make the top 10 REALTOR® -recommended projects in NAR’s 2019 Remodeling Impact Report which examined a variety of remodeling projects and their appeal, value and potential return on investment.

An additional 21 percent of homeowners expect new investments such as a home office, gym or other space that will offer the greatest return — other projects REALTORS® would not have recommended as a top priority based on 2019 data.

Some renovation priorities remain unchanged: Kitchen and bathroom upgrades and remodels were highly recommended by REALTORS® in 2019 and continue to top most homeowners’ current lists.

 

These home renovation tips could save you some cash

The real estate market is red-hot in many parts of the United States and if you just bought a house, you probably have plenty of projects you want to tackle.

But it can be tough deciding on which ones you take on first. USA Today shared some tips to help you prioritize and get the renovations done.

Step one: Create an overall budget.

You want to have a maximum amount set that’s available for all the projects. You should also come up with a vision of how you want the home to eventually look. Painting is one of the low-cost and simple improvements that you can tackle early on. Changing or replacing the lighting in a room is also another improvement that can be done quickly.

Step two: Think about issues like the flooring. Planks that snap together give you an affordable option to upgrade the look of a room.

Step three: Bigger, more expensive renovations like projects in the kitchen or bathroom can get pretty pricey. In all, homeowners last year planned to spend $10,000 on renovations, so the key is to make sure you get the most out of your home improvement budget.

Construction projects on the rise across the nation

Home remodeling is booming across the country with more than three-quarters of all homeowners saying they’ve done some type of home improvement project during the COVID-19 pandemic.

Nationwide, an online home remodeling platform reported a 58% annual increase in project leads for home professionals in June, 2020. In Wichita Falls, city officials said they have noticed a rise in residential and commercial construction.

“Both residential and non-residential project, just seeing more and more of that is just being started without a permit so we really wanted an opportunity to reach out to the public and says hey if you have a project and its going to need a project and we can answer that question,” Development Services Director Terry Floyd said.

Floyd also said following city regulations could save you time and money in the future.

“Insurance companies, they want to know the verification of this work, so an addition to your home or major work comes up they may be a question that may come up when you go to sell your home,” Floyd said.

Remodeling professionals like Scott Autin have been staying busy during COVID19. The owner of A-plus construction said anyone looking to remodel needs to do their research when hiring a contractor.

“Check with the BBB. Check with the city to see if they are licensed and bonded. If you don’t do that, you’re going out on a limb, and there is no protection fortitude at that point,” Autin said.

Protection could also help you avoid dangers, such as digging into pipes underground or cutting into electrical wires. For those who try to save money and cut corners around a project could face city citations.

“Sometimes we may charge extra for a permit review if the job was started without a permit, really the citations are up to five hundred dollars, but that’s a last resort for us. We generally, if not almost always, work with them to get with compliance,” Floyd said

So whether you are hammering out working on outdoor spaces or building a new home, Floyd and Autin hope you will do your due diligence before starting any project.