You’ve been thinking about remodeling your home or building new for some time. You have a good idea of what you want, and a general idea of what your project will cost. Now you’re ready to find a contractor. But how are you going to pay for the project? Several financing options are available.

Mortgage lenders commonly state that homeowners should not spend more than 28% of their monthly income on their mortgage, but the average American spends nearly 33% of their money on housing. This can cause people to become “house poor,” so that they struggle to pay for basics.

Therefore, the most important question is: What can you really afford? Of course, paying for the entire project out of savings is ideal if you can afford it, but most people will be looking at financing.

To help determine your budget, start by making a list of what you pay monthly for debts, including your mortgage, car loan, credit cards, and any other bills that have a fixed monthly payment. Then figure out your gross monthly income, and what you have for a down payment. This is information that a lender will use to determine your debt-to-income (DTI) ratio. The DTI will need to be low in order to qualify for a loan.

Based on your debts and income, give some thought to how much you can afford to pay on a monthly basis, and have that number handy when you meet with your lender.

Financing Options for Home Remodeling:

      • Personal Loan. Also called a “home improvement loan,” a personal loan is unsecured – you are not required to put your house up as collateral. Personal loans typically have a fixed interest rate and fixed monthly payment.
      • Home Equity Loan. A home equity loan is a separate loan in addition to your mortgage. You’re borrowing against your equity, which is the home’s value minus what you still owe on the mortgage.
      • HELOC. A home equity line of credit works like a credit card with a pre-approved limit. Unlike a home equity loan, the interest rate is subject to change.
      • Mortgage Refinance. This involves taking out a new mortgage loan to replace your existing one. It’s a good choice when interest rates have dropped since getting your original mortgage loan, but you do have to pay closing costs. There is also a “cash-out” mortgage refinance, where you take the extra money in the new mortgage as cash for the remodel.
      • Credit Cards. It’s a simple financing option that usually comes with higher interest rates.
      • Government FHA Loan. An FHA rehab loan combines your mortgage and home improvement costs into one loan insured by the Federal Housing Administration. It’s a common choice when you buy a fixer-upper or older home that you will be remodeling right away.

Additional Financing Options for Home Building:

      • New Construction Loan. Construction loans are shorter term, usually only one year for the building of the property. With a construction-to-permanent loan, it transitions to a traditional mortgage once the building is complete.
      • Construction-Only Loan. This loan must be paid off when the building is complete. At that time, you’ll need to set up a separate loan for the mortgage.

It’s important to note that a low credit score can eliminate the possibility of a loan, while a higher credit score could mean lower interest rates. Also, it is not recommended to take money out of a retirement account if it can be avoided.

When you call Dimension Design-Build-Remodel to discuss a remodeling project or the construction of a new home, we’ll ask about your budget and the scope of the project to begin the preliminary design phase. We don’t offer rough estimates; it takes time to determine the details of your project and the accurate estimate of what your project will truly cost.

Before the project begins, we’ll carefully go through the contract with you. It will spell out the total cost, how payments will be made, and when they will be made, leaving no uncertainty for anyone. We’re happy to answer any questions and make sure we all agree on project details and expectations.

Have you explored the financing options for your design/build home project? Are you ready to start the process? Call 262-402-6602 or complete our contact form to arrange the first appointment.