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Renovation Loans: The Good, The Bad, and the Ugly

I'll start off by saying that most home renovations aren't completed with renovation loans. Most home renovations are completed using a home equity line of credit (HELOC), or with a cash-out refinance. Of these two, a cash-out refinance is probably the preferable option unless the renovation process will be especially long and drawn out. And in any case, following a major project a HELOC balance should always be paid down using a cash-out refinance, for three reasons:

1) A HELOC's interest rate is adjustable whereas a cash-out refinance's rate is fixed (or at least temporarily fixed).

2) When a HELOC's repayment period starts, usually ten years after the HELOC is opened, the credit line turns into a fully amortized loan, so the monthly payments can double or more.

3) Because of recent changes to the new tax code, interest paid on a HELOC is no longer tax deductable, whereas interest paid on a cash-out refinance is tax deductible (on loan amount of $750k or less).

That being said, this article is about a class of mortgages that's much more interesting than a standard HELOC or cash-out refi. It's about bonfide, renovation mortgages. There are three main varieties of these mortgages available: