Renovating an investment property can greatly increase its value and rentability. However, funding major renovations solely out of pocket can be difficult. That’s where renovation loans come in handy. A renovation loan allows investors to finance improvements to their investment properties over time. When searching for the best renovation loan for your investment property, there are several key factors to consider, including loan terms, interest rates, and lender requirements. Read on to learn more about finding the optimal renovation loan for your next investment property project.
Compare Interest Rates on Investment Property Renovation Loans
Interest rates can vary significantly between different renovation loan options. Generally, secured loans like home equity loans and cash-out refinances will have lower interest rates than unsecured options like personal loans. However, government-backed renovation loans like FHA 203(k) loans lock in below-market interest rates. Shop around and get quotes from multiple lenders to find the most competitive interest rate for your situation.
Look for Flexible Loan Terms
The loan term, or length of the loan, is another important factor. Longer terms of 20-30 years mean lower monthly payments, while shorter terms around 5-10 years have higher payments but pay off the balance quicker. Choose a term length that aligns with your budget and investment timeline.
Understand All Fees and Closing Costs
Beyond the interest rate, renovation loans can come with various fees like origination fees, application fees, and title fees. Government-backed loans like FHA 203(k) loans limit the fees lenders can charge. But for other loans, comparison shop to find options with lower fees.
Consider Lender Requirements
Lender requirements vary based on the type of renovation loan. For FHA 203(k) loans, you’ll need a minimum FICO credit score around 580-640. Cash-out refinances often require a 620+ credit score and at least 20% equity in the home. Check lender requirements upfront to ensure you qualify.
Look for Loans that Allow Self-Management
With some renovation loans, lenders require you to use a general contractor they approve to oversee the work. This can be more expensive. FHA 203(k) loans allow self-management of renovations as long as you have some renovation experience.
Finding the optimal renovation loan requires comparing interest rates, fees, terms, qualification criteria and contractor requirements across multiple options. Government-backed loans like FHA 203(k) loans offer below-market interest rates and flexible terms, making them one of the best financing vehicles for investment property renovations.