October 25, 2018
Credit card use data from a company called Argus, and other studies indicate that as many as one in three home owners paid for home renovations in 2017 using a credit card. It’s estimated that more than $140 billion worth of home improvements were financed by credit card.
Credit card interest rates vary, but if you’re paying more than 10% interest on that credit card and thinking about using one to finance your home repairs in 2019, you are likely paying too much in interest compared to an FHA home loan or refinance loan.
What are the options with FHA mortgages and home repair? Can you apply for an FHA mortgage at a lower interest rate than your credit cards and get your home repairs accomplished without paying unnecessary interest?
Naturally, your interest rates will be determined in part by your financial qualifications, but even those with marginal FICO scores who still qualify for an FHA mortgage or refinance loan will pay less than 10% interest on the loan at the rates quoted in 2018 at the time of this writing.
What kind of FHA loan product is right for your home repair needs?
FHA Cash-Out Refinance
If you have owned your home for a while and have paid down your mortgage or have rising property values that justify a cash-out refi loan, the FHA cash-out option is one to seriously consider for one important reason. There are no restrictions on how you can use your loan proceeds. You can use the money to repair your home, add swimming pools or barbecue pits, etc.
The swimming pool/BBQ pit issue is mentioned here because with an FHA 203(k) Rehab Loan (also available as a refinance) there are restrictions on the repairs or renovations you can make.
One of those restrictions says FHA 203(k) loan funds can’t be used to install a pool or barbecue-any so-called luxury item is prohibited under this type of loan. Not so with an FHA cash-out refi.
FHA 203(k) Rehab Loans
The FHA 203(k) rehab loan and FHA 203(k) refinance loan can be used to repair a home, do major structural work, and raise the property value through approved renovation projects.
There are two kinds of FHA rehab loan; one is a limited 203(k) with a much smaller dollar amount for projects that don’t involve structural modification.
These limited 203(k) loans are not as much as the original mortgage amount, making them perfect for borrowers who want to do a home improvement project that is small enough that they would be tempted to put the whole thing on a credit card. FHA loan rules say the borrower must work with an approved contractor and the type of work to be done is regulated by the FHA loan program.
The “full” FHA 203(k) rehab loan or refinance loan is a much larger loan, permits structural work, and the borrower can do big projects around the house with these funds.
An approved contractor may be required, the borrower may not (depending on lender standards) be able to do her own work, but the 203(k) rehab loan or refinance version of the 203(k) can help you avoid using a credit card with a higher interest rate to finance such projects.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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