Payments on your renovation loans really aren’t fundamentally different from a conventional mortgage payment. Each month, a portion of the monies allocated will go to paying down the principal amount borrowed, another portion will go to paying interest over the lifetime of the loan. A portion of the original borrowed amount will be held in escrow to pay the various contractors and vendors who are working on your renovation and construction project.
Payment Differences With Renovation Loans Programs
While FHA203k and HomeStyle loans work similarly in the way they disperse payments to contractors, the differences lie in what exactly is wrapped up into the total size of the loans, which translates into where the monies in each monthly payment goes — principal, interest, insurance, etc.
To illustrate the differences, consider the following example:
You’ve just found a home you’d like to buy and it’s listed (and appraised) at $200,000. It’s structurally sound, all the systems in the house are in excellent condition, and it has the number of bedrooms and baths you want.
The only problem? The kitchen.
The appliances are woefully outdated and the cabinetry needs a total facelift. According to the terms of both the 203(k) and HomeStyle loans, you collect estimates from contractors and submit them to your mortgage lender. Lenders must approve all contractors before any work can commence, and those contractors will be paid in installments as the work is being completed. For the sake of comparison, the total estimate for the kitchen remodel, including new appliances, countertops and cabinetry is $50,000. The local licensed appraiser places a post-construction value on your home at $300,000.
|FHA 203K||Fannie Mae HomeStyle|
|Maximum Borrowable Amount||110% of post-renovation value or purchase price +renovation costs, whichever is lower||50% of post-renovation value for repairs|
Mortgage Insurance Premium
|1.75% of total loan amount, plus .85% annually on principal balance||N/A|
|Mortgage Amount (less down payment)||$245,250||$237,500|
|Upfront Mortgage Premium||$491.88||$4156.25|
You’ll note the major difference between the two loan programs respective to what’s included in your monthly payment is the mortgage insurance premium. As FHA-backed products, 203K loans require mortgage insurance which is bundled into your monthly payment along with paying interest and paying down the principal amount borrowed.
In the end, though, the impact on your monthly mortgage payment between a FHA 203K and a HomeStyle loan will be dictated by the size of the renovation project you’re financing — and that all comes down to the scope of work. Interest rates are near all-time lows and continue to trend down which means the right time to buy a home and finance repairs along the way is, well, right now.