Common Types of Borrowing for Home Renovation?

You can borrow from a bank, a savings and loan, a credit union, or a mortgage banker. You can even borrow the money online over the Internet. Here are the most common types of borrowing.



FHA Title 1. These are mortgages insured by the federal govern¬ment. The biggest advantage is their high loan-to-value ratio (how much of your home's value you can borrow against).



Pros

1. Financing up to the full value (100 percent) of your home

2. Competitive interest rates Usually quick funding

3. Interest deductible up to limits

4. Minimal appraisal required

5. Available from most banks



Cons

1. Maximum loan limit (currently $25,000)

2. Money must be used for functional repairs or renovation (not for adding a spa)

3. Home must be owner-occupied



Become familiar with LTV (loan-to-value) ratios if you're going to put your property up as collateral. An LTV is the percentage of the home's appraised value the lender will loan. For example, an 80 percent LTV on a $100,000 house is $80,000-the maximum loan. All lenders on real estate live by LTV limits. Some will lend only 80 per¬cent LTV. Some put the limit at 60 percent, while others go to 90 percent or higher. Also, be aware of CLTV (combined loan-to-value) ratios, which are based on the total of all the mortgage loans on your property. Similar limits may apply here as well.



Credit Cards

A credit card loan is probably the most expensive way to borrow. You can simply get a cash advance to pay for labor costs, or charge the materials on your card.



Pros

Money readily available to anyone who has a credit card, up to its limits

No appraisal required

Available everywhere



Cons

Highest interest rates, often 18 to 24 percent

Interest not deductible



Home Improvement Loan

A home improvement loan is actually a construction mortgage on your property. Your home is the collater¬al and you are paid as the work is done. Available from banks and some savings and loans, the loan is actually a second mortgage on your property. Thus you have two payments-your existing first mortgage and the new home improvement loan. Generally, you must maintain a loan-to-value ratio of 80 percent, but you are allowed to add construction costs to the value of your property.



Pros

1. Usually available for full amount of renovation

2. Competitive interest rates

3. Interest deductible up to limits



Cons

1. Lender holds back the money in stages until the work is completed, often causing significant delays

2. Money can be used only for the renovation project, not for living expenses

3. Home must qualify through appraisal

4. Borrower must fill out lots of paperwork and come up with complete plans, estimates, and a list of contractors

5. Home must be owner-occupied



Home Equity Loan

A home equity loan is like a home improvement loan in that it puts a second mortgage on your property. However, use of the money is not restricted to just home improvement.



Pros

1. Can be used for any purpose

2. Competitive interest rates

3. Interest usually deductible up to limits

4. Quick funding, usually within two weeks

5. Usually available as a revolving line of credit, allowing you to borrow up to the maximum at any time and pay back any amount at any time



Cons

1. Usually limited to 80 percent loan-to-value ratio (loan can-

2. not be more than 80 percent of your home's value)

3. Often contains a substantial prepayment penalty if you want to sell or refinance and have the home equity loan removed

4. Home must qualify through appraisal Home must be owner-occupied



Beware of new mortgages offered for more than your home's value-typically advertised as 125 percent mortgages. The interest rate is often higher than the going market rate. Further, the IRS may consider all or a por¬tion of the amount to be a personal loan. Thus, the interest may not be tax-deductible, and the loan may tie up both the property and you personally.



Now, if you have enough budgets for home renovation. You should know how to make the most of space in your home and how to use solar energy for your home.

These two things are really important for home renovation.