Deciding whether to remodel or build a home can be challenging. Figuring out how to pay for it can be even more so.

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Q: We’re looking to finance a pretty extensive home remodel. Can you make it less scary?

A: Deciding whether to remodel or build a home can be challenging. Figuring out how to pay for it can be even more so. When it comes to financing your dream home, knowing all your options up front will significantly reduce stress.

Let’s examine several financing options available in today’s market.

Remodel and renovation

If you are updating a kitchen or bath, building an addition or purchasing a home that you will renovate, there are several financing options available to you. If you currently own a home, you may qualify for a home equity line of credit. This is a convenient way to pay for smaller improvements.

If your project is much bigger, such as an addition or major home renovation, consider using a renovation loan. These loans combine the purchase or refinance of the home, plus cover renovation costs. Borrowers typically have six to nine months to complete the renovation. Your interest rate is fixed at the beginning, so you avoid interest rate risk, and the single loan structure eliminates the need for multiple loans and costs.
For some borrowers, the financing may be based on the value of the newly remodeled home.

Buying a new home

There are many reasons to consider purchasing a new home rather than remodeling an existing home. A new home is move-in ready, likely more energy efficient (via lower utility bills), can feature new appliances and a modern design, and you may have the opportunity to choose a floor plan that suits your lifestyle.

The challenge with purchasing a new home is that your home may not be ready for four to six months, exposing you to interest-rate risk.

Look for a lender that offers long-term extended locks that protect you from interest-rate fluctuations.
Also, ask your lender how long your credit documents are good and if they have appraisers who specialize in new construction. This may help reduce last-minute errors, delayed closings and requests for new documentation.

Custom construction

Building a custom home is a dream for many people. Figuring out how to finance it? Not so much.

Consider using an all-in-one construction loan. These loans combine the home construction and lot purchase or land payoff with one loan. After construction is complete, mortgage payments begin without requiring you to refinance the construction loan, saving you thousands of dollars in potential costs.

With an all-in-one construction loan, your interest rate is locked up front before work starts, and you make interest-only payments over the term of construction. Flexible financing options are available.

After construction is complete, some lenders may offer more favorable terms than those of your loan. This option is commonly known as a float down.

The decisions around whether you remodel, renovate, build an addition or custom home, or simply purchase a new home can be complex. Figuring out how to finance your project should not be. Start your conversation with your lender early on.

Stacia Weisaer is a loan officer at HomeStreet Bank and a member of the Master Builders Association of King and Snohomish Counties, and HomeWork is the MBA’s weekly column. If you have a home improvement, remodeling or residential homebuilding question you’d like answered by one of the MBA’s more than 2,800 members, write to homework@mbaks.com.