This article originally appeared on Real Simple.com.
A bank loan is often the only thing keeping a real estate project from being completed.
But when you’re renovating your home, the lender has an important job to do: repair your property.
When you receive a loan to renovate your home to a loan of at least $10,000, you’re not just getting a mortgage for a $20,000 purchase.
You’re also getting an advance payment, or “bail,” that’s guaranteed to pay off your home in 15 years, if everything goes according to plan.
“The interest rate is set to be the same as your mortgage,” says Michael Loeffler, the director of real estate at the real estate brokerage firm Loeffe & Loefler in Boston.
“So if you don’t get that money in, it doesn’t matter how good the work is, the interest rate isn’t going to be anything.
The lender is just taking on a risk and hoping for the best.”
Loeffle & Loeschler has been servicing mortgage loans for years, and Loeppler says he has no problem with banks charging higher rates to borrowers with lower incomes.
“If the borrower has a $200,000 mortgage, they should get a 20 percent down payment, and if they have a $50,000 loan, they ought to get a 30 percent down,” Loeffer says.
“But that doesn’t happen when you are asking for a 20 or 30 percent payment for a home.”
In some cases, lenders are offering mortgage loans to people who might not qualify for other types of loans.
Loeefeld explains that they can only offer a 20-year loan to a borrower with a $75,000 home, a 25-year mortgage to a buyer with a house worth $200 or more, and a 30-year loans to buyers who are in their 30s.
“It’s just not a sustainable practice for a bank to make,” he says.
Loeffer explains that if you’ve already spent years refinancing your home and have had trouble refinancing, a mortgage loan could help you get the work done.
If you already have a loan, it’s unlikely you’ll need to refinance, but if you need a loan in order to get the job done, Loefeld says a mortgage is a great option.
“There’s a reason why banks are making money from refinancing mortgages,” he explains.
“If you’ve got a mortgage, it makes sense to go out and get a loan,” says Loehler.
“We know it works for many people.
So you’re better off just getting the job, getting a loan.”
A good loan can be a huge help if you’re looking to replace a damaged or damaged-in-place house.
If the house is in poor condition, or is in a poor condition for years after you purchased it, you can use a refinancing loan to get your home back on the right path.
“When you have a house that’s not going to last very long, and you’re paying $20 million to $25 million a year for maintenance, you might as well buy it right now,” Lohler says.
If that’s the case, it could be a good time to consider refinancing.
Loeschner says if you already own a home, you probably already have the cash in hand to get started.
“A bank doesn’t need to make a mortgage on a property that is in good shape,” he adds.
“They need to do it for a loan that will pay off over 15 years.”
Loeschtner says it’s important to remember that refinancing isn’t necessarily the same thing as a loan.
“You may get an interest rate of 2 to 4 percent,” he points out.
“That’s the interest that the bank is getting from you.
But that’s just a reflection of the interest rates that the lender is charging.”
For more information on refinancing a loan or a property, see the Bankrate Home Mortgage Guide.
Follow Brian Riedel on Twitter at @BrianRiedel or visit his website at TheRealRealLife.com