When purchasing a fixer-upper or planning to renovate your new home, you might wonder if it’s possible to include renovation costs in your mortgage. The good news is that several mortgage programs allow you to do just that, potentially saving you from taking out separate loans or dipping into your savings.
Renovation Mortgage Options
There are several mortgage programs designed to help homebuyers finance both the purchase of a home and its renovation costs:
FHA 203(k) Loans: These government-backed loans allow you to finance up to $35,000 in renovations for minor repairs or more for extensive renovations.
Fannie Mae HomeStyle Renovation Mortgage: This conventional loan option lets you borrow up to 75% of the home’s post-renovation value for improvements.
Freddie Mac CHOICERenovation Mortgage: Similar to the HomeStyle loan, this program allows you to finance renovations along with your home purchase.
These renovation mortgages typically offer more flexible terms and lower interest rates compared to personal loans or credit cards, making them an attractive option for homebuyers looking to customize their new property.
Benefits of Adding Renovation Costs to Your Mortgage
Including renovation costs in your mortgage can offer several advantages:
Single loan and payment: You’ll have just one loan to manage instead of juggling multiple financing options.
Potentially lower interest rates: Mortgage rates are often lower than those for personal loans or credit cards.
Longer repayment terms: You can spread the cost of renovations over the life of your mortgage, potentially lowering your monthly payments.
Immediate improvements: You can make necessary repairs or desired upgrades right away, rather than waiting to save up or take out additional loans later.
Considerations and Limitations
While adding renovation costs to your mortgage can be beneficial, there are some factors to keep in mind:
Loan limits: Each program has specific limits on how much you can borrow for renovations.
Approval process: Renovation mortgages often require more documentation and a longer approval process than standard mortgages.
Contractor requirements: Many programs require you to work with approved contractors, which may limit your options.
Higher overall costs: While monthly payments may be lower, you’ll pay interest on the renovation costs over the life of the loan, potentially increasing the total amount paid.
Before deciding to add renovation costs to your mortgage, carefully consider your financial situation, the scope of your planned renovations, and the long-term implications of increasing your mortgage amount.