Home renovation loans are the smartest way for homeowners to finance their entire renovation project. Renovation loans use a home’s estimated after renovation value instead of its current home value to calculate how much a homeowner can borrow. This gives homeowners credit for a home’s future value in addition to get the lowest rate possible, as lenders typically set rates based on the loan to value ratio.
Borrower’s home value today is $500,000, and they have an outstanding mortgage of $350,000. They are seeking $250,000 for renovation. For traditional home equity loans, borrower can loan up to 80% of the current home value. That is $500,000*80% =$400, 000. Minus the mortgage balance of $350,000, borrower can only loan $500,00.
For renovation loan, the future value of the home is $750,000, borrow can loan $750,000*80%=$600,000, when deduct the outstanding mortgage balance of $350,000 from the $600,000, they can get $250,000 to renovate.
Thus, renovation loans are the best type of renovation loan to finance your home improvement projects.