Many people, especially financial planners, will tell you not to finance home repairs into a mortgage. Who wants to pay for that mold removal for the next 30 years? In reality that sounds like it makes sense, but the 203K loan is different. Yes, if you financed the repairs on a home in any other type of mortgage, such as a cash-out loan, you would be paying for those repairs for the next 30 years or whatever the term of the loan is at that time. There is a major difference with the 203K loan that you should understand though. If you want a profitable option to generate money and avoid loans, read this post about fx trading online.
The Future Value Matters on a 203K Loan
The equity in a home financed with a 203K loan is based off of the future value. What does this mean? It means that the current value of the home “as is” is figured in order to determine the appropriate sales price for the home, but the actual LTV of the loan you are taking out is based on the value of the home after the repairs are done. Chances are if you are taking out a 203K loan, you are making extensive repairs. These repairs should have significant impact on the value of the home. Unless you are borrowing the maximum LTV amount, which is 110%, you are getting instant equity in your home. Let’s take a look at an example:
You purchase a home for $100,000. The current value is $110,000, so you already have almost 10% equity in the home. You took out a 203K loan for $1450,000 because you are doing $40,000 in repairs and need to have that 10% cushion should something go wrong with the repairs. Once the repairs are completed, the value is estimated to be at $175,000. Once the work is completed, only $42,000 needed to be disbursed because everything went just about as planned, so the extra $3,000 went towards the principal of your loan. Based on the new value, you now have 19% equity in your home, which helps to decrease the burden of paying for those repairs for 30 years.
The alternative to this type of loan would be to pay for the repairs outright or take out another type of loan. Typically a personal loan or even home equity loan will have more fees and higher interest rates than the FHA 203K loan. If you chose to pay for the repairs outright, you are likely going to wipe out your savings, which puts you at risk for defaulting on your mortgage in the future should something happen. You always have the option to pay the principal of your 203K loan down should you have a windfall and be able to pay it, but if you don’t, it is perfectly acceptable to make the monthly payments and enjoy the house the way that you fixed it up!
The 203K loan makes it possible to purchase a home that others might look right over. Whether it is a foreclosure or just a home that was not kept up, it can be yours for a lower price and with the added value of being able to fix it up just how you want it. Don’t overlook the possibility of this type of loan when you are shopping for a home. It is easy to qualify for and provides you with many benefits that other loans are not able to provide. Instant equity is not something that you will find in any other loan – and is something well worth exploring in order to ensure that you love the look of the home you purchased to live in for the next many years.
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