Looking to fund a remodel? Consider a renovation refinance

Refinancing with a renovation loan is a way to borrow money for home improvements at a lower interest rate than personal loans or credit cards.

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Is using your kitchen table as an office-slash-kids’-classroom making you long to upgrade your home?

Sixty-one percent of American homeowners have taken on home improvement projects since March 1, 2020, according to NerdWallet’s 2020 Home Improvement Report.

But before you can join them, you’ll have to decide how to finance your project.


NerdWallet.com is a personal finance website and app.

Refinancing with a renovation loan is a way to borrow money for home improvements at a lower interest rate than personal loans or credit cards.

And instead of paying back a separate loan, the costs of your updates are rolled into your new mortgage payment.

Here are three reasons to consider refinancing with a renovation loan.

Reason 1: You can take advantage of low interest rates

With mortgage rates falling throughout 2020, the number of mortgage refinances has skyrocketed.

With a renovation refinance, improvement costs become part of your new mortgage amount. While it may not compare to a credit card with a 0% introductory APR, a renovation refinance gives you a higher borrowing limit. And you’ll pay much less interest than you would on a personal loan for the same amount of money.

Reason 2: Remodeling is an accessible alternative to buying

Though the spring homebuying season got off to a slow start due to the coronavirus, real estate markets throughout the country have since heated up.

According to the National Association of Realtors, 69% of homes sold in August were on the market for less than a month and the inventory of unsold homes was down almost 19% when compared with a year prior.

More than 1 in 5 (21%) of those who have tackled home improvement projects since March opted to do so instead of looking to move, according to NerdWallet’s 2020 Home Improvement Report.

Reason 3: You may add value to your home

A smart renovation can boost your property’s value.

A 2019 joint report from the NAR and the National Association of the Remodeling Industry found that replacing outdated heating and cooling systems or upgrading insulation offered some of the best returns on investment when it came time to sell.

And, unlike a cash-out refinance, a renovation loan may expand your budget by allowing you to borrow against the home’s expected value after improvements are complete, rather than its current value.

Similarly, you may be able to take advantage of a renovation refinance even if you haven’t owned your home long, since these loans require less equity than a cash-out refinance, home equity line of credit or home equity loan.

Tips for using a renovation refinance

Research the right loan product: Renovation loan options include Freddie Mac’s CHOICERenovation loan, Fannie Mae’s Home Style renovation loan and FHA 203(k) refinance loans from the Federal Housing Administration. Your credit score and the improvements you plan to tackle determine which renovation loan is right for you, Zeitz says.

Get familiar with refinance requirements: In addition to available home equity, your lender will examine your credit score, debt-to-income ratio and employment history to determine if you qualify for the renovation refinance loan you’re seeking.

Find an experienced contractor: In order to know how much you’ll need to borrow — or how much your home may be worth once the remodeling’s done — you’ll need accurate cost estimates from a licensed contractor.

Comparison shop lenders: Though rates are low, comparing interest rate quotes from at least three lenders will ensure you get the best deal.

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