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- What Should You Expect to Pay in Closing Costs for Home Renovation Loans?
What Should You Expect to Pay in Closing Costs for Home Renovation Loans?
- By Chris Esposito
- Published 07/3/2009
- Real Estate
- Unrated
When looking for home renovation loans for your home improvement project, you will undoubtedly want to compare financing programs and closing costs. If you want a home rehab loan, you will need to make sure you are comparing apples to apples when looking at overall loan fees. A specialized home improvement loan will have slightly more fees than simpler mortgages, but it should be worth it in the long run.
Home renovation loans will typically have more fees associated with them as compared to simpler types of loan products, such as purchase loans or refinance loans. These loan fees, though, aren't typically paid in terms of excessive discount or origination points. In the financing industry, one point equals one percent of the loan amount. Therefore, if a loan has three points in the closing costs, then that would equal a total of 3 percent of your loan amount.
Points come in all shapes and colors. For example, you are probably familiar with origination points or even perhaps discount points. However, home renovation loans shouldn't have many more points than simpler loans. For example, it is pretty common to secure a purchase loan with just one point for either discount or origination. Similarly, you ought to be able to find home rehab loans that also charge just one point.
There is one slight variation, though. For the FHA 203k program, a home renovation loan designed specifically for home improvement projects, there will be an additional 1.5 points that gets applied just to the rehab portion of the overall budget. This supplemental origination fee isn't a percentage of the whole loan amount, but instead just a percentage of the smaller renovation costs. Therefore, it's typically a negligible amount.
However, origination and discount points aren't the only fees to consider when comparing home renovation loans. You should also take a look at the other administrative costs of negotiating a home improvement project. A lender is going to need to add some fees for the administration of the home rehab loan that it wouldn't have for a simpler purchase or refinance loan.
For example, there will be additional costs for draw administration and for title updates during the renovation period. These extra costs can add up to about $1,000, which is pretty typical across the board. If you are comparing home renovation loans, just make sure to pay attention to these costs. You most likely won't see much difference in this category from one lender to another, but it is definitely something to be aware of.
The overall question you should ask yourself, then, is whether these extra fees are worth it. Should you pay a little extra for the chance to complete
a home improvement project? If your home renovation loan is structured properly, then the answer should be a resounding yes. First of all, the loan should be a one-time-close program, meaning your home improvement loan will have just one closing to cover the purchase of the property, the rehab phase, and the conversion to the permanent loan. Suddenly, these slightly higher fees are spread over three loan phases and prove to be more than reasonable.
Compare the extra costs for home renovation loans to the amount of equity that you will earn by fixing up the property. Typically, the only way to gain this instant equity is to use cash to pay down a mortgage. But, with home renovation loans for well-planned home improvement projects, the equity can be built through smart repairs and upgrades that add more value than the amount that is being financed.
So, when looking for home renovation loans, always look at the big picture. The extra administration costs for draw fees and title updates should be more than worth it. But, what about other fees wrapped into home renovation loans that you won't find with simpler purchase loans? For example, the FHA 203k program will have an additional 1.75% fee called an Up-Front Mortgage Insurance Premium (UFMIP).
The UFMIP from FHA 203k home renovation loans is an extra closing cost that is necessary because the loan is insured by the federal government. In other words, the federal government protects lenders in case borrowers default on the loan. The only way to make this cost-effective for everyone involved is to include the UFMIP in the closing costs.
There are two pieces of good news that come with this UFMIP, though. First, the FHA 203k home improvement loan will allow you to wrap that 1.75% into your loan amount. So, you don't have to pay it out of pocket. It just means a slightly smaller amount of instant equity you will be building into your property. If the home improvement project is planned properly, there should be plenty of instant equity to go around.
Second, the UFMIP helps the FHA 203k home renovation loans keep their guidelines as flexible as possible. In other words, there are millions of people around the country who wouldn't qualify for a home rehab loan if it weren't for the flexible FHA guidelines. Credit score requirements are lower. Down payments are small. And, there are no cash reserve requirements.
If you are a truly qualified borrower with great credit and lots of cash to use for a down payment, then you can avoid the UFMIP by looking at other home renovation loans, such as the Fannie Mae (FNMA) home improvement program. Either way you go, though, the extra closing costs should be more than worth it, as long as you are planning properly and looking at the big picture. Good home renovation loans will always make much more sense than hard money or credit cards for your home improvement project.
Home renovation loans will typically have more fees associated with them as compared to simpler types of loan products, such as purchase loans or refinance loans. These loan fees, though, aren't typically paid in terms of excessive discount or origination points. In the financing industry, one point equals one percent of the loan amount. Therefore, if a loan has three points in the closing costs, then that would equal a total of 3 percent of your loan amount.
Points come in all shapes and colors. For example, you are probably familiar with origination points or even perhaps discount points. However, home renovation loans shouldn't have many more points than simpler loans. For example, it is pretty common to secure a purchase loan with just one point for either discount or origination. Similarly, you ought to be able to find home rehab loans that also charge just one point.
There is one slight variation, though. For the FHA 203k program, a home renovation loan designed specifically for home improvement projects, there will be an additional 1.5 points that gets applied just to the rehab portion of the overall budget. This supplemental origination fee isn't a percentage of the whole loan amount, but instead just a percentage of the smaller renovation costs. Therefore, it's typically a negligible amount.
However, origination and discount points aren't the only fees to consider when comparing home renovation loans. You should also take a look at the other administrative costs of negotiating a home improvement project. A lender is going to need to add some fees for the administration of the home rehab loan that it wouldn't have for a simpler purchase or refinance loan.
For example, there will be additional costs for draw administration and for title updates during the renovation period. These extra costs can add up to about $1,000, which is pretty typical across the board. If you are comparing home renovation loans, just make sure to pay attention to these costs. You most likely won't see much difference in this category from one lender to another, but it is definitely something to be aware of.
The overall question you should ask yourself, then, is whether these extra fees are worth it. Should you pay a little extra for the chance to complete
Compare the extra costs for home renovation loans to the amount of equity that you will earn by fixing up the property. Typically, the only way to gain this instant equity is to use cash to pay down a mortgage. But, with home renovation loans for well-planned home improvement projects, the equity can be built through smart repairs and upgrades that add more value than the amount that is being financed.
So, when looking for home renovation loans, always look at the big picture. The extra administration costs for draw fees and title updates should be more than worth it. But, what about other fees wrapped into home renovation loans that you won't find with simpler purchase loans? For example, the FHA 203k program will have an additional 1.75% fee called an Up-Front Mortgage Insurance Premium (UFMIP).
The UFMIP from FHA 203k home renovation loans is an extra closing cost that is necessary because the loan is insured by the federal government. In other words, the federal government protects lenders in case borrowers default on the loan. The only way to make this cost-effective for everyone involved is to include the UFMIP in the closing costs.
There are two pieces of good news that come with this UFMIP, though. First, the FHA 203k home improvement loan will allow you to wrap that 1.75% into your loan amount. So, you don't have to pay it out of pocket. It just means a slightly smaller amount of instant equity you will be building into your property. If the home improvement project is planned properly, there should be plenty of instant equity to go around.
Second, the UFMIP helps the FHA 203k home renovation loans keep their guidelines as flexible as possible. In other words, there are millions of people around the country who wouldn't qualify for a home rehab loan if it weren't for the flexible FHA guidelines. Credit score requirements are lower. Down payments are small. And, there are no cash reserve requirements.
If you are a truly qualified borrower with great credit and lots of cash to use for a down payment, then you can avoid the UFMIP by looking at other home renovation loans, such as the Fannie Mae (FNMA) home improvement program. Either way you go, though, the extra closing costs should be more than worth it, as long as you are planning properly and looking at the big picture. Good home renovation loans will always make much more sense than hard money or credit cards for your home improvement project.
Chris Esposito
Chris Esposito specializes in home renovation loans for clients who wish to finance their home improvement project with a one-time-close, fixed rate mortgage. For more information about home rehab loans, visit www.DirectRehabLoans.com, or call (877) 876-3688.
View all articles by Chris Esposito