Three Ways to Finance Your Renovation

Three Ways to Finance Your Renovation

You love your neighborhood and everything about where you live, but you wish you could make some changes to your home. 

You’re not alone with this thinking. But many homeowners don’t move forward since they believe that financing and lack of cash is a roadblock for them when it comes to renovating their current home.

Below are four financing options that can help you make that renovation come true!

Remember to always meet with a financial advisor and perhaps also a tax advisor before you pursue anything. There are pros and cons that you need to fully understand based on your specific financial situation.

Don’t Overspend

Before you learn more about the details of HOW to finance your renovation, it’s very important to decide on the amount of money you can spend on your renovation.  

Please be cautious not to over-improve your home for the neighborhood or spend your renovation dollars on details that won’t provide “return on investment” when you resell.  

I highly recommend getting in touch with a local realtor to discuss what this means for you. You can always circle back with the agent that helped you purchase the home since they know the background of your home already. Neighborhoods can vary a lot, so getting the insight on the market and neighborhood trends is an important first step while in the research and planning phase of your renovation.

Just because you spend the money on “improvements” to your home doesn’t mean you are guaranteed to get it back when you sell. Let’s make sure that doesn’t happen with your renovation, whether it’s a big or a small one.

Pros and Cons for Each Finance Option

1. Home Equity Line of Credit (HELOC)

With a “line of credit,” you are approved for a certain credit limit based on your home’s equity.

Remember, the equity in your home is basically the difference in the home’s current market value and the balance left on your mortgage.

A HELOC functions almost like a credit card — you can withdraw money when you need it over the lifetime of the loan.  You can take out money and pay back money.

Your payments change based on how much of a loan you’ve taken out as well as what the interest rate that month.

Pro: You typically pay interest only payments on the amount you withdraw and not on the total amount approved. Interest rates are usually lower than credit cards.

Just like a second mortgage, you can leave your current mortgage alone if you have a fixed term. No need to mess with a good thing!

This is a great option for folks who are going to be able to pay off the line of credit with an upcoming bonus, sale of another home, or other lump sum coming their way.

Con: Credit lines have variable interest rates rather than fixed rates so your repayments can change depending on the interest rate at the time you withdraw money.

You should carefully review all requirements, fees, penalties and how often the interest rate is adjusted since HELOCs can vary depending on the lender.

2. Renovation Financing Loan

If you don’t have much equity in your home, you can consider a renovation loan. The lender bases the loan on what your home will be worth once the renovation is complete.

For this loan, you refinance your current home and add on the amount needed for the renovation to the same loan. So it’s one large loan, not a second mortgage.

This loan requires that you work with a contractor and architect and not do any DIY work. Rather than getting a lump sum directly to you, the lender is the one who pays the contractor as the work is done.

Pro: You don’t need as much equity in your home now because the loan is based on the value of the home once the renovation is complete.  

Monthly payments on these loans are typically lower than credit cards or personal loans.

Con: Your mortgage balance will increase since you are refinancing with a larger amount. The lender has more say over the timeline and process of the renovation. This money is only used for a renovation with a contractor, who the bank pays directly.

3. Cash Out Refinancing

This financing is similar to a renovation financing, but lenders base the loan on what the home is worth now, not when the renovation is completed. So you’ll need equity in your home.

For this loan, your original mortgage loan is paid off and the amount needed for the renovation is rolled over into the new mortgage total.

This can be a good option if interest rates have gone down recently. You’ll be able to take advantage of lowering your interest rate while at the same time tapping into the equity of your home for the renovation. It’s like a “two-for-one special” of the loan world.

Just make sure interest rates are lower than your original loan.  If not, it may make more financial sense to do one of the other options.

Pro: The amount needed for the renovation is given directly to you in one cash payment rather than having the lender pay the contractor. You have more flexibility with this financing.

Con: Keep an eye out for interest rates so you don’t get a higher one than you have now.

Choose Carefully for Your Situation

Remember to choose a financing option that works well for you in both the short and long-term, weigh the pros and cons of all viable options for your situation.  This is something I can help you with!

Having the ability to stay in your current home and neighborhood with a renovation can be a huge plus for many homeowners. But just be aware of the time, energy and possible displacement that living through a renovation entails before you move forward and start the process.