Financing Home Improvements

July 21, 2000, Revised March 22, 2004 "I want to make major renovations to my home. I know they will substantially enhance its value. What is the best way to get the financing I need?"  Tap your equity. If you have substantial equity and good credit, a home equity loan is the simplest way to obtain the financing you need. The combined total of a home equity loan and your current mortgage can be as high as 125 percent of your home's current value. An equity loan may be pricey, especially if it takes you above 100% of property value, but you need not have it very long.  After the renovations are completed, you can refinance based on a new appraisal that will reflect the renovations.  If the renovations are sizable, consider financing based on the value of your home once the work is complete.  Future value financing is more complicated.  There is a greater potential for error estimating future property value than determining current value.  Lenders offering future value financing may rely on appraisers who specialize in valuing renovations.   Lenders also feel the need to control the disbursement of funds to make sure that the work is done properly Lender surveillance could be a nuisance, or it could be a blessing if you can't or don't want to supervise the work.   Many lender don�t offer future value financing because it is so complicated. Among those that do are Wells Fargo and GMAC Mortgage.  Consumers who are purchasing a home that needs major repairs may apply for an FHA Section 203K loan that allows you to buy and renovate with a single mortgage.   It is a complicated program, however, with a lot of paperwork, and most lenders avoid it.    Consumers looking to renovate their current house, or to buy a house that requires renovations, need to find the lenders who provide these types of financing in their area.  Mortgage brokers will usually know who these lenders are. Postscript: Diane Vitalo, a loan officer in Rhode Island, took exception to my comments about the FHA Section 203K program.  She says that "While it is a little more involved than a regular mortgage, the 203k is neither difficult nor complicated. A lender who is well versed in the FHA products can close this loan in 30 - 40 days. In addition to purchasing a home with this product, a homeowner may use it to refinance and add repair costs to the loan. I service primarily first time buyers in the $50,000-$150,000 price range and find the FHA products to be the best around. Down payments are low, sellers can help with closing costs, repairs can be financed at time of purchase or within a refinance. The interest rate is lower than those of home equity lines." Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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