Suppose you find the perfect house for your family. It has a wonderful backyard, a spacious kitchen, and three excellent bathrooms, which will make a weekday morning far more peaceful for your growing family. It seems like the perfect choice except for one major problem: it needs a complete replacement of the shingles, which, taking into account down payments, closing fees, and other costs, you simply can’t afford at this time.
Many people would simply pass on the home.
But you don’t have to pass if you use a HomeStyle Renovation loan. This program provides financing for not only the purchase of a property, but also the renovation and remodel of your new home.
With this program, you can purchase a home and make a wide variety of home improvements. Necessary structural changes, such as roof replacement, foundation repair, or gutter upgrades, are certainly available. But you can also use this program to make changes that simply improve your overall enjoyment of the property. For example, you can replace the cabinetry in the kitchen, install new flooring in the bathroom, or even build a new addition to the house.
From granny flats to solar panels, there is virtually no limit to this program.
To make the program even more flexible for borrowers, there are different terms available. Using a HomeStyle Renovation loan, you can get a 30-year fixed-rate mortgage, a 5/1 adjustable-rate loan, or a 7/1 adjustable-rate loan. Each has it’s advantages, so if you are going to use the HomeStyle program, make sure you understand the details of each so you can make the right choice for your purchase and renovations.
Learn About the 3 HomeStyle Renovation Loan Terms
With this program, you have three options. One is a fixed-rate loan, which provides greater stability, simplicity, and consistency, while the other two are adjustable-rate mortgages, which can provide lower payments during the initial years.
Fixed-Rate Mortgage
There are three different HomeStyle renovation loan terms, but the most popular may be the fixed-rate option. With a fixed-rate mortgage, you secure a loan with an interest rate that never changes; once the loan is issued, the rate stays the same regardless of changes to nationwide interest rates or adjustments by the Federal Reserve. This also means that the monthly mortgage payment stays exactly the same throughout the life of your loan.
For example, if you make a purchase totaling $400,000 with a 10% downpayment ($40,000), you would, according to our mortgage calculator, have a monthly payment of $1,771. 30 years later, when you make the final payment on the loan (assuming you stay in the house, of course), your final payment would be $1,771. Having this secured monthly rate makes budgeting and financial planning simpler, which is a major draw for fixed-rate mortgages.
With a fixed-rate loan, you are protected if interest rates go up. However, if interest rates go down, you don’t get the benefit of a lower interest rate. It stays the same, so you lose out on potential savings that may have come with an adjustable-rate loan.
Adjustable-Rate Mortgages
The next two HomeStyle Renovation loan terms are adjustable-rate mortgages. Adjustable-rate mortgages (ARM loans) are the opposite of fixed. Instead of an interest rate that is locked in for the lifetime of the loan, they have interest rates that are adjusted based on various indexes.
While the interest rates are adjusted, the “margin” stays the same. The margin is simply the percentage points that are added in addition to the initial interest rate. For example, if the margin is 3% and interest rates are 2.5%, your total would be 5.5%. However, if interest rates climb to 3%, the total would be 6%. (3% index + 3% margin = 6%)
Adjustable-rate mortgages also have a cap. Essentially, at the creation of the loan, there is an established maximum interest rate, which reins in the potential for extremely high rates on your loan if, for whatever reason, indexed rates were to skyrocket. There is also a cap on the amount an interest rate can climb from one period to the next, which protects you from sudden and extreme interest changes.
These loans generally have an introductory period when the interest rate is locked in, giving you a level of stability and predictability for the first five years or more. Once the initial period is over, the interest rates are adjusted to match the indexes. If interest rates have risen, so will the interest on your ARM loan; if rates have dropped, the rate on your loan, as well as the monthly payment, will decline.
Adjustable-rate mortgages also have a limit on how often the interest rate can be adjusted, which is usually one year.
5/1 Adjustable-Rate Mortgages
One of the HomeStyle Renovation loan terms is a 5/1 ARM loan. With this structure, you have a 30-year loan that comes with an initial period of 5 years (the “5” in 5/1) without any changes to the interest rate or the payments. After five years, the interest rate is adjusted to match current rates being used around the country. Throughout the loan, the terms will be adjusted annually, which is noted by the “1” in 5/1.
7/1 Adjustable-Rate Mortgages
The other option for adjustable-rate mortgages is a 7/1 program. With this option, you will pay a fixed-rate for the initial seven years of the loan. Throughout this period, your interest and payment total will not change, giving you an initial period of predictability. Once the first seven years are complete, your interest rate will be adjusted annually.
Work with a Lending Expert Who Understands HomeStyle Renovation Loans
At San Diego Purchase Loans, we are dedicated to providing outstanding service. Contact us today and our staff will walk you through the benefits of all the HomeStyle Renovation terms so you can make an informed, confident decision.
With a common-sense approach to mortgage underwriting, we can increase your chances of approval on a loan that fits your specific needs and budget!
