Buying a home is a fun and exciting process. But almost no one has ever bought a home and thought it was perfect on day one. Whether you want to do a full remodel, finish a basement, or just install new blinds, you need the money to make the upgrades.
After buying a home, coming up with the cash for a remodel may be difficult. So, can you take out extra money from your mortgage for home improvements when buying a home with a mortgage?
Take Out Extra Money From Your Mortgage
When you buy a home, it is presumed you are doing so at the market price for the loan. This is verified by the home appraisal, which is a required step in getting a mortgage for a home.
The appraisal rarely gives a value far above the purchase price, so your limiting factor is the loan-to-value on home. The loan-to-value is a method to calculate your equity as a homeowner. If you put down a 20% down payment, your starting loan-to-value is 80%, as the loan amount is 80% of the value of the home.
Some lenders are willing to do loans up to the value of the property if you pay extra for private mortgage insurance, but most banks frown on this if you have the assets to put in a higher down payment. So what can you do to come up with more cash to increase the value of the home?
203K Rehab Loans
The government Housing and Urban Development department, known as HUD, is the agency responsible for 203k Rehab Mortgage Insurance. This is the best avenue for getting extra money from your mortgage when you buy a home.
If you want to buy a home and get a mortgage for more than 100% of the home’s value, you can apply for a 203k loan, which can pay you cash for home remodeling and upgrades when you close your purchase.
These loans are complicated and uncommon compared to standard mortgage loans, so if you want to go this route be sure to research and understand the rules and limitations before you get started.
Refinance for Remodel
Another option is to wait a while after buying to do a major upgrade. As you make mortgage payments each month, you are increasing your equity in the home, which can later be accessed through a refinance. You can also wait for the home’s value to increase, as a higher appraisal later on may allow a refinance or second mortgage on the home to access cash for an upgrade.
Refinancing has transaction costs, however, so if you are going to wait for a remodel, it might benefit you to put money into savings each month for the upgrades rather than tap your home equity.
Only Make Upgrades That Will Pay
While some aesthetic upgrades are nice while you are living in the home, not all remodels are created equally. Some remodels will raise the home value only a little, while others usually raise the value by more than the cost of the project.
Your first focus for a home improvement that will pay off should be in the kitchen, the bathrooms, and maybe a wood deck in the back.
If you are ready to find your next fix-and-flip, be sure to have the best agent to guide you through the process.