Your Ultimate Guide to Home Improvement Financing

home improvement financing FI

Whether you’re looking to sell your property in the future, or simply want to make improvements to live more comfortably, you need to consider your financial decisions properly. It is only through smart renovations that you’ll not only improve the value and utility of your property but also boost its resale value. 

Most Canadians typically prefer to work, socialize, and relax at home. Proper renovating provides numerous opportunities to make a home that reflects your preferences on how to live and enhances the way you enjoy life. Whatever you want to do,  you’re sure to find your answer in this guide. 

Here’s a list of the ways you can get started on your home improvement financing:

Best Ways To Finance Your Home Improvement Project

Cash-Out Mortgage Refinance

One of the most popular ways of financing for home improvement is a cash-out mortgage refinance. With this, you’ll refinance the ongoing mortgage for more than the outstanding balance you have right now. 

For instance, if you owe $300,000 on a home that cost you twice as much, you can take out a loan of $400,000 to replace your original loan while also receiving cash back at closing. You might get smaller monthly payments and a lower interest rate with your new mortgage.

Second Mortgage

If you don’t feel comfortable financing home improvement projects via refinancing, you can opt to pay for your home renovations by securing a second mortgage. This is another option where you’re borrowing against your house’s equity and using your property as collateral. Getting a second mortgage will award you with a lump sum of money, which you can spend however you like.

You’ll be subject to closing costs in most cases, and the interest rate is either variable or fixed.

Unfortunately, the downside to this is that even the most financially responsible people sometimes fall victim to poor financial decisions or acquire some bad mortgage or financial advice. That’s why it would be in your best interest to get in touch with a reputed and reliable mortgage advisor before you engage with specific second mortgage lenders.

Home Equity Loans and HELOCs

Home Equity Loans

A home equity loan is like a second mortgage that uses the value borrowers have invested in their property to take out more money. Many lenders allow homeowners to borrow approximately 80% of their home’s value, except for what they owe on their mortgage. 

The more borrowers pay off their mortgage, the more loan they can take out. Unlike a refinance, home equity loans give you a completely new mortgage.

Unfortunately, the interest rates for home equity loans tend to be higher. According to Bankrate, a company that keeps track of interest rates estimates that interest rates for home equity loans are approximately 6% on average. In comparison, those of mortgage refinance are 4% for a 30-year fixed-rate mortgage at max.

Home Equity Line Of Credit (HELOC)

A home equity line of credit behaves much like a credit card as it’s a revolving line of credit. Like a home equity loan, you can access approximately 80% of your property’s value, apart from what you already owe. Despite that, HELOC offers more flexibility than a home equity loan.

Most HELOCs come with variable interest rates, meaning your payments can increase depending on the market conditions. 

HELOCs have repayment and draw periods. The draw period, which usually lasts around 10 years, allows you to use your credit line money. The monthly payments typically cover interests mainly and a bit of principal on any outstanding balance. On the other hand, the repayment period, which can last approximately 15 years, consists of monthly payments that might be higher as they might have more principal. 

Personal or Unsecured Loans

Unsecured loans aren’t affiliated with a borrower’s collateral. This concerns those homeowners who haven’t secured enough equity in their homes. If you’re not comfortable putting your entire property on the line, then this is the option for you. Those who don’t have much home equity built up can opt for a personal loan.

Personal loans are for those who are looking to make smaller improvements, like installing doors or windows. Borrowers are liable to loan amounts as low as $1,000. And unlike home equity loans, the borrowers are not at risk of losing their property should they fail to repay the loan on time.  

However, the interest rates are typically higher with personal loans. What’s more common is that the repayment period is shorter, between 5 to 7 years.

Credit Cards

For minor improvements, like having a new closet system installed, or upgrading your bathroom vanity, using a credit card would be one of the wisest options. The advantage over here is that some cards are free of interest for the first couple of months. For instance, if you have a 0% introductory APR card, you can pay for minor home improvements without being bothered by interest. Some cards also have cash back facilities, which means the more you spend on a renovation, the more cash you earn back.

 However, sometimes credit cards contempt borrowers to make large-scale home improvements as well, and that’s something that you should avoid. Suppose you’re unable to pay back what you owe before the end of the introductory offer. In that case, you might be facing some seriously high-interest rates – possibly even higher than other home improvement options mentioned in this list.

And if you’re using a regular credit card instead of an introductory offer one. In that case, you need to pay the entire amount back by the next pay period – which is typically a month – to avoid stacking up interest. But be wary of shifting market conditions as it could escalate the interest you pay, especially if you’re dealing with variable interest rates. 

Asking Your Contractor For A Loan

 Home contractors can offer a loan between 12 to 18 months. This is typically done via a third-party lender. For instance, LendKey, a website that provides contractor loans, recently provided fixed interest rates between 6.4% to 12.49%, depending on a borrower’s credit. 

It may also be possible for you to acquire an interest-free loan from your contractor. But if you’re unable to pay off the amount from the interest-free loan before the expiration of the term, you might be Boeing interest dating back to the day you first signed the agreement. 

Save Up Money

If you’re looking to finance home improvements without accumulating debt, the best advice we can give you the best advice to save up money. In other words, use the cash and liquid assets that you already have. Unless there is a surplus of additional money lying around, using liquid assets is your cue to save up or opt for budgeting.

This only means that you need to cut back on unnecessary spendings or purchases and find ways to save money wherever you possibly can. Doing so will allow you to pay for your home improvements completely without knowing anyone.

Unfortunately, instead of having some immediate cash at hand without some of the loan options mentioned in this article, you’ll need to delay your home improvement project for a couple of months. 

Nevertheless, there are a handful of benefits that come with funding your home improvement project in this manner. Some of those benefits include not having to account for high-interest rates, ongoing payments, surprise charges, or even lending fees. It also allows you to bypass the annoyingly lengthy process to get your loan approved and secured through a lender.

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