How to Finance a Fixer-Upper Home
How to Finance a Fixer-Upper Home
A home that needs a lot of repair is what's known as a "fixer-upper" because it needs to be "fixed up." There are several reasons you might buy a fixer-upper. Because of their less-than-peak condition, it can be a less expensive alternative to buying a newer home; fixing it up may be the only way to have a home that meets your needs; you might be an investor looking to "flip" the home (fix it and sell it for a profit); perhaps the home has been in your family for generations and you want to keep it that way; or you might be someone who just enjoys the challenge.
Whatever your reason, it's going to take a significant amount of cash to make whatever changes or repairs the home needs. So where are you going to get the money?
Well, you could pay for the materials, home repairs and home improvements on your credit card. But these days, that's not necessarily the best use of your credit. Credit card companies are requiring higher minimum monthly payments and credit card interest rates can be very high.
Another way to do it would be to dip into your savings. But then, that's not the best use of your money either. What if you had an emergency that you had to deal with? Perhaps your car's engine gives out and you need to have it repaired. If you had no savings, then you might have to use your credit card. Again, with higher interest rates and minimum monthly payments, that can get expensive.
Probably the best way to get the money for fixing up a home is to tap into your existing home equity. There are a few ways you can do this:
You can get cash from your home equity by refinancing your existing mortgage for more than the balance you owe. For example, if your existing mortgage balance is $100,000, you could refinance into a new mortgage for $150,000. You still owe the $100,000, but you'd have another $50,000 to use for the home improvements. Use the Quicken Loans Cash-Out Refinance Calculator to find out how you can refinance to get cash out of your home.
Home Equity Loan
You could get a second mortgage on top of your existing mortgage. A home equity loan gives you a lump sum of money that's good to use for a one-time big expense. This is also a good way to get cash from your home equity, especially if you've hired someone to do the repairs and plan to pay them all at once. Use the Quicken Loans Home Value Calculator to calculate how much home equity you have to work with.
Home Equity Line of Credit (HELOC)
Another good way to finance the home repairs and improvements is to get a home equity line of credit (HELOC).
A HELOC is also a second mortgage, but instead of one lump sum of cash, it works more like a credit card by using your equity as your line of credit. You can draw from it anytime you need to and pay it off as you use it. This is very handy when you have, say, several contractors doing different work and need to pay them all at different times.
Benefits of Using Your Home Equity
There are great benefits to accessing your home equity to get cash for a fixer-upper. The first is that the interest you pay on a mortgage is usually tax-deductible (consult your tax advisor for details), unlike the interest on a credit card. The second is that the interest rate you could get on a home loan is lower than the rate you get on a credit card.
Third, there are many different loan options available these days, some with interest-only payments built into them which means that, in any given month during the interest-only period, you're only required to pay the interest portion of the monthly payment. That kind of flexibility and smaller monthly payment could make it even easier for you to handle paying for those home repairs.
There are several ways to finance a fixer-upper that can give you added benefits without having to make high monthly payments or dip into your savings, and when you're done, you'll have a beautiful home to show for it. To find out more, please call a Quicken Loans home loan expert at (800) 963-2177.
Courtesy of ARA Content
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