New type of home equity loan caters to major renovation projects Bankrate.com Brandon Segal was set to make a substantial addition to his historic house in a Philadelphia suburb, but he wasn’t sure how to pay for it. He didn’t have enough equity to cover the six-figure renovation bill with a home equity line of credit or a cash-out refinance. A construction loan struck Segal as complicated and cumbersome. Segal settled on a home equity loan through RenoFi, a financial technology company that connects homeowners with credit unions willing to loan based on how much a house will be worth after upgrades are completed. “I like the ability to borrow based on what my appraised value is going to be,” Segal says. RenoFi served as a matchmaker, directing Segal to Ardent Credit Union, a Philadelphia lender. He took a 20-year, fixed-rate loan to pay for a two-story addition to his 1920s home. HOME IMPROVEMENT TAKES OFF DURING THE PANDEMIC The coronavirus pandemic has turned home improvement into a national pastime. In one illustration of that trend, the National Association of Home Builders’ remodeling index soared during the pandemic. Home-improvement retailers and remodeling contractors reported spikes in business. Contractors Guide | Spring 2021
With many Americans working from their home offices, more homeowners have developed a hankering for upgrades to their spaces. Meanwhile, a spike in home prices and a shortage of homes for sale limits the choices available to those who’d traditionally be move-up buyers. The national median price of homes sold by Realtors spiked 12.9 percent from December 2019 to December 2020. Housing inventory fell to a record low, according to the National Association of Realtors. Segal, for his part, loves the house he shares with his wife and their three daughters, but the quarters were getting cramped. He found a contractor to add a master bedroom and other living space to the house. Paying for home improvements can pose a challenge, however. A home equity line of credit (HELOC) is one tried-and-true source of renovation funds. But HELOCs work only for homeowners with significant equity. If you owe $300,000 on your $400,000 property, a bank is unlikely to lend $100,000 through a HELOC. To keep your loan-to-equity level at 80 percent, or $320,000, you’d be able to borrow just $20,000. RenoFi offers a different approach: Homeowners can borrow up to 90 percent of their home’s after-renovation 14
value. The company has partnered with credit unions throughout the country to offer the loans, says Justin Goldman, founder and chief executive of RenoFi. Goldman launched the company after experiencing firsthand the challenges of paying for renovations on an older home. He created RenoFi to fill what he sees as a gap in the market. Goldman found most lenders didn’t offer after-renovation loans, so he began persuading credit unions to add RenoFi home equity loans to their offerings. HOW RENOFI LOANS WORK RenoFi loans are second mortgages. In one example, Ardent Credit Union offers 20-year loans at a fixed rate of 4.25 percent, Goldman says. That’s higher than the rate on a primary mortgage, but it includes the flexibility of allowing homeowners to borrow against yet-tobe-created value. Borrowers pay for an appraisal that establishes the home’s value after renovation. The appraiser looks at the proposed construction plan and determines by how much the work will boost the property’s market value. The typical RenoFi customer borrows $150,000, Goldman says. At that amount, a 20-year loan with a 4.25 percent interest rate carries a monthly payment of $929.
