Historically, in my career within renovation lending and the mortgage industry, renovation loans have been predominantly a purchase product. Not that it has been marketed as a purchase only product, but many fall victim to using the programs only when homes need substantial rehabilitation. Anyone who has sat through any of my sales and marketing seminars for renovation lending, knows there are far more opportunities then “gut rehabs” for these products. Another opportunity that many may be missing right now, is for refinancing with a renovation loan!
The obvious opportunity for refinancing with a renovation loan comes when a borrower wants to do work on their home and doesn’t have the equity and/or cash to pay for the improvements they desire. This creates a great need for the renovation loan. Borrowers can borrower against the equity they are going to create with the improvements they will make, to help pay for the improvements. These improvements become part of the loan along with the payoff of the original mortgage.
What many in lending may be missing is the unique opportunity that exists for using a refinance with a renovation loan when a homeowner may be thinking of buying a new home! Rates are not falling (at least not on the day this has been written), and we are not in a true refinance market in most of the country. However, now may be a terrific time to think of a renovation refinance! Why, you may ask?
As noted in a previous posting, housing inventories are at their lowest levels in decades! This housing shortage creates unique and new opportunities for those interested. Many families may desire a larger home as their families grow, but finding those homes may be troublesome. Finding an affordable larger home may be nearly impossible. Enter the renovation refinance.
For families in this situation, the ability to find a home in an area they desire, may be difficult. The cost of turnkey homes in nice neighborhoods will be at the top of the price scale. Finding a home that needs some work may be an option, but still may be expensive, due to low inventory creating less affordable housing. Many of these homeowners may like their currrent neighborhood, but the home is just not sized correctly for their family. In these instances, homeowners should consider renovating the home to fit their needs. This option may have double benefit to the borrower.
First, it can allow the borrower to remain in the neighborhood they like and create the home they need or desire to meet their family needs. They can enlarge the home, allow for accessibility options, and add living space needed for the family. They can also repair any known issues that may exist to give them piece of mind for years to come.
Second, it may be the best solution from a financial aspect. The improvements and repairs made may create more equity than it costs to create the space, giving the borrowers a better equity position in the property. Increasing bedroom/bathroom count and square footage may increase value far more, especially when values are already increasing in many areas. This provides a two-fold benefit to the borrower:
- They obtain the home they need and desire for their family, in a neighborhood they know and love
- Improve their financial situation by increasing equity in their home, instead of “paying” for a new home at higher costs
In addition to growing families, older homeowners may want to modify their home for their senior years. This was noted in “Demographic Change and the Remodeling Outlook”, released by the Joint Center for Housing Studies at Harvard University. The report lists aging in place as one of the emerging growth opportunities for remodelers ( page 26 of the report).http://www.jchs.harvard.edu/research/remodeling-futures
These examples illustrate the opportunity of refinancing with a renovation loan. While some borrowers would need a higher rate than their current loan may have, the net benefit could be far better financially for the borrower. In renovation lending, rate is important, but unlike a standard non-renovation loan, there are many other factors that need to be examined by the borrower to illustrate the true benefit of a renovation loan. In these examples, the overall cost of a renovation loan may be the most inexpensive way to pay for renovations that make the home what the borrower needs. Show borrowers all the factors to allow them to make an educated decision and you will find that often there are opportunities refinancing with a renovation loan, even when we are not in a traditional refinance market.
Good luck and keep thinking renovation!!