Despite the rapidly changing economic climate of the last month, now could be an ideal time for you to start planning a home renovation. What better time to dream up possibilities than with all this extra time spent at home? Falling interest rates have created an opportunity for some thrifty homeowners to secure home improvement financing options for large projects – at a competitive rate.
If budgeting has been holding you back from starting, keep reading to learn how falling interest rates can help you find a home renovation loan. There are several types of home improvement financing options for homeowners looking to start a home renovation project.
Home Equity Line of credit (HELOC): A loan in which the lender agrees to lend up to a maximum amount, where the collateral is the borrower’s home equity. A HELOC provides a pool of money to draw from as needed – you can use as much or as little as you need, similar to a credit card.
Home Equity Loan: Another loan in which the borrower uses the equity of his or her home as collateral. A home equity loan gives you the entire lump sum upfront in one transaction.
Refinancing with Cash Out: The refinancing of an existing mortgage loan, where the new mortgage loan is for a larger amount than the existing mortgage loan, and you (the borrower) get the difference between the two loans in cash.
I spoke with Jennifer Ellis, AVP Business Relationship Manager at Navigant Credit Union, to learn more about how current events and falling interest rates are affecting home improvement loans. Jennifer shared information and advice on how homeowners can secure their own HELOC, Home Equity Loan, or Refinance their mortgage.
The answer is on a case-by-case basis:
If you currently have a first mortgage with a rate that is over 4.75%, you own your own home, and plan on staying in your home for years to come, the best option might be to Refinance (assuming that you have enough equity in the home.)
If your first mortgage has a rate of less than 4.75% or you own your home outright than a Home Equity Line of Credit or a Home Equity Loan would be the better option. The decision between a home equity LINE versus a LOAN would also be on a case-by-case basis.
I would recommend a Home Equity Loan if the reason for financing is solely for renovations that will improve the value of the home and if the applicant wants a fixed payment that they can count on each month.
If the applicant wants the flexibility to pay back the financial institution at their own pace and/or they want to use the funds for other purposes at a later date, I recommend a Home Equity Line of Credit.
As of March 2020, the Prime rate dropped to 3.25%. That drop affected Home Equity Lines of Credit as lines are revolving and tied to the Prime Rate. However, the drop in prime last week made an insignificant change to mortgage rates.
As of March 25, 2020, the interest on a 30-year fixed mortgage is about 3.625% and a 15-year mortgage is about 3.25%. If a person’s current mortgage rate is over 5.0% then it is time to consider refinancing, but there should not be a sense of urgency as the rates are likely to remain low this year and they may even come down a little more in 2020.
A homeowner should apply for a Home Equity Line of Credit at least 6-weeks before they want to secure financing. In normal times, I have seen home equity loans and lines turn around (from application to closing) in 3-4 weeks. Right now with the current climate, it could take 6 weeks or longer to secure a home equity line – and mortgage refinances are taking even longer (these are not normal times).
I recommend that anyone who owns their home should have a home equity line available for emergency purposes. There is no need to wait until you are doing home renovations; sometimes it is easiest to apply and get approved for a loan when you don’t “need” it.
With a Mortgage Refinance with cash-out for renovations, a client can borrow up to 80% loan-to-value (LTV) without Private Mortgage Insurance (PMI) and up to 95% LTV with an Adjustable-Rate Mortgage (ARM) product.
With a Home Equity Line or Loan, a client can borrow up to 95% LTV on their primary residence, but they will pay a premium rate (1.0%-3.0% or higher) than if they borrow less.
In order to take advantage of the best, lowest rate, borrowing 75% LTV or below is best. With a “gold” credit (Score > 730) the rate today would be as low as Prime less 0.50%. [As of March 25, 2020, that would equate to 2.75%]
For Mortgage Refinances, depending on the lending institution, there is an appraisal fee of $300 – $500 as well as closing costs and attorney fees. With a Home Equity Line or Loan, there are no fees. At Navigant, we do not charge an application fee nor an annual fee and we pay for the appraisal!
There are not any restrictions shy of using the funds for illegal business.
The term for an Equity Line of Credit is a 10-year draw. A Fixed Home Equity Loan can have terms of 5, 7 or 10 years which is determined at the time of application.
Eligibility, approval, and rates are scored based on a combination of the following: Credit Score; Loan-to-value; and debt to income ratios.
If you have more questions about Home Equity Lines of Credit, Home Equity Loans, or Refinancing, you can contact Jennifer for more information.
Jennifer Ellis | AVP, Business Relationship Manager | 2100 Warwick Avenue Warwick, RI 02889 | Office: 401.319.2973 | Cell: 401-862-6261 | firstname.lastname@example.org
Red House Custom Building is open for business during this time for all of your home renovation needs.
We care about the health and safety of you and your family. Read a letter from our Founder, Justin Zeller, for information on how we are staying safe on the job site, in the office, and at home.
To learn more about virtual home consultations or how you can start our design process from the safety and convenience of your own home, read our article on Helpful Technology and Virtual Meetings for Home Renovations during COVID-19.