With mortgage rates still hovering near record lows, buying or building a new home or refinancing an existing mortgage can save you big money. But there’s another, less obvious way to take advantage of this historic opportunity. You could purchase a house and immediately make major improvements. And if you handle the financing correctly, you should be able to cover all of your costs—buying the house, fixing it up, and even the expense of carrying the mortgage while you live elsewhere—with a single low-rate loan.
You can get this special kind of purchase-renovation mortgage through lenders approved by Fannie Mae, the giant mortgage packager. (For a list of those in your area, go to www.homepath.com.) To determine how much you can borrow, the lender will consider the purchase price of the home and the cost of the planned remodeling. Assuming it’s a single-family house that you’ll occupy yourself, you should be able to finance as much as 95% of the total cost of buying and fixing the place or the appraised value of the home after renovations, whichever is less. You’ll need to present not only a contract for the purchase of the house but also for the work you’ll have done; the lender will check out the contractor and monitor the construction as it progresses, making payments in stages.
You can also use this financing approach to pay for updating your current house or a vacation home. Because it takes into account what the property will be worth after renovation, you’ll have more money available than if you were simply to borrow against existing equity. And you can finance up to six months of mortgage payments to cover your housing costs during construction. Lenders offer all of the standard mortgage types and terms—15- or 30-year, fixed or adjustable rate—and if rates are still low when the work is finished, you might be able to refinance at even better terms.