Americans still spend more than $500 billion a year on remodels and home improvements, according to Harvard’s Joint Center for Housing Studies.
Improvements before or after a purchase or sale are way down because sales are way down. So, it’s homeowners who can’t or don’t want to move who are driving these numbers.
But here’s what’s interesting for this blog: much more remodeling would happen if homeowners knew how many options they had for pulling cash out of their homes.
About 34% of renovating homeowners use credit cards to finance improvements, according to Houzz. Many others are simply waiting for rates to fall because they don’t realize other solutions exist in a high-rate environment.
Here are seven ways to get cash for remodels, ADUs, & construction:
1. HELOC (Home Equity Line of Credit)
This is often the cheapest and easiest way to get cash.
Pros:
- You pay interest only on the money you draw, when you need it.
- HELOCs are very low-cost or free, and very easy to get now that some firms underwrite in minutes with AI.
- Borrowers can pull cash whenever they need it, without a draw schedule or lender approval (as with construction loans).
- Borrowers don’t have to refinance out of a low-rate first mortgage to get cash (see #5).
Cons:
- Rates are variable and thus somewhat riskier.
- Sometimes not enough cash for a major remodel.
2. Fixed-Rate Second Mortgage
Pros:
- The rate is fixed, so it’s less risky.
- No draw schedule or draw approvals (as with construction loans).
Cons:
- Fixed-rate seconds cost more than HELOCs and are harder to get.
- Rates are relatively high (much higher than first-mortgage rates).
- Borrowers get all the money up front, often before they need it, so they pay interest on money they aren’t using yet.
- Sometimes not enough cash for a major remodel.
3. After-Repair-Value HELOC
These HELOCs are based on the property’s value after the improvements are done, and they can go up to 95% of the after-repair value.
Pros:
- Much cheaper and easier than a construction loan.
- No draw schedule or draw approvals.
Cons:
- The rate is higher than on a regular HELOC.
- Harder to get than a regular HELOC because valid plans and specs are required.
- Sometimes not enough cash for a major remodel.
4. After-Repair-Value Hard Money / Non-QM
We now have hard money and non-QM investors that lend against the after-repair value too. These loans are mainly for investors. Some of our hard money options now go up to 90% of the after-repair value — something I never thought I’d see from hard money lenders.
Pros:
- An easy way to get cash without the hassle of a full-doc approval or a construction loan.
- No draw schedule or draw approvals.
Cons:
- Rates and fees are much higher than with the other options.
5. Cash-Out First Mortgage
I’m not a fan of this option in a high-rate environment.
Pros:
- Fixed rate.
- Only one mortgage to worry about.
- No draw schedule or draw approvals.
Cons:
- Borrowers pay interest on cash they don’t need yet.
- Cash-out loans carry higher rates.
- Borrowers may be paying off an existing low-rate first mortgage.
6. Renovation Loans
These are quasi-construction loans offered through FHA, Fannie Mae, Freddie Mac, and VA. They’re also based on the after-repair value (the completed project value), and they can be done as a purchase or a refinance.
Pros:
- Rates are first-mortgage rates, well below HELOCs, seconds, and construction loans.
- Can provide more cash than a HELOC.
Cons:
- Many lenders cap the construction budget, e.g., at $200,000 or $250,000.
- Contractor specs and bids are required, plus more paperwork overall.
- Large-dollar improvements are subject to draw schedules and draw approvals.
- Limited to improvements to existing properties (no ground-up construction).
- FHA and VA limit the types of improvements, e.g., no new swimming pools.
- On a refinance, borrowers may be paying off an existing low-rate first mortgage.
7. Construction Loans
Construction loans finance ground-up construction and major remodels. They’re also based on the after-repair value or the completed project value.
Pros:
- Can finance high-dollar projects.
- Few restrictions on the types of improvements.
Cons:
- Rates and fees are higher than on renovation loans.
- Detailed contractor specs and bids are required, plus a lot more paperwork overall.
- Lenders have strict draw schedules, timelines, and draw approval processes.
Over the last four years, we’ve mastered all of these loans, and we can now help virtually any homeowner who needs cash for improvements — no matter how big or small the project.
Borrowers don’t need to be intimidated by the paperwork some options require. We’ll walk them through everything.
