I’m considering home renovations on the home I own in the next couple of years. I have quite a bit of equity in my house today, but not enough for the extensive renovations I’d like to undertake (I own a duplex, would like to build an addition).
I have heard about these loans (I know that Wells Fargo offers them, but other banks may too: https://www.wellsfargo.com/mortgage/learning/refinance-renovate-layer)
I have yet to speak to a bank, but as I understand it:
- Your house before renovation is worth X amount
- You hire a contractor to draw up plans
- The bank approves those plans with an expectation that after the renovation your house will be worth more than X (let’s call it Y)
- After the renovation, the house is reappraised for the higher value and then refinanced for that larger amount
On paper, this idea sounds more attractive to me than a traditional home equity loan. For one, I think I can get more money, as the loan amount would equal a percentage of my higher Y value instead of my lower X value (as with the home equity loan). Plus, the interest rate for a re-fi is far lower than that for a home equity loan, particularly in the dollar value/LTV ratio I’d need to take out on a home equity loan.
(Full disclosure: since I’m sure folks will be tempted to raise their concerns: I’m nowhere near underwater on my house, and I have plenty of reserve savings in the bank, i.e. I can afford to renovate my house either way, and get the value back after the reno-- I have the stereotypical “cheapest house on the expensive block” and thus would prefer to stay and reno versus move. My issue is that I’d like to go higher end on the reno because I intend to stay for the long haul, I’m not looking to just do a fix-and-flip, and a home equity loan with its LTV restrictions and higher interest rates isn’t an ideal mechanism for me).
Anyway… if anyone knows any more details about these loans, whether they’re a good value, how hard it is to appraise the new work (and what happens if it doesn’t appraise), etc., I’d appreciate it! 