Renovating your Home in the New Year: Financing the Reno
By Mike Eide
So it’s 2015 and you have decided it is time to get that home renovation done that you have been pushing off for the last little while. Well it can be a scary task to enter without the right help, and sometimes even the help you get can make it a scary or painful experience. Over the course of the next 5 weeks we will be writing on tips to help you get that home renovation off the ground and running.
How to Finance Your Home Reno
First things first, congratulations on deciding to start your home reno. Before starting anything though you must decide how you will finance the project. Nothing will be worse than a incomplete renovation in your home because you have ran out of funds. There are six different ways you can come up with the finances and they are:
Personal Line of Credit
Home Equity Loan
While this is probably the most fiscally responsible option it is also the toughest one for most homeowners. We live in a very cash poor society where most people rely heavily on some sort of credit or another. With that said, if you have the cash at your disposal than this can be a great way to get the job done. Also paying contractors and tradespeople in cash might help you with deals in the long run equalling a cheaper renovation.
Now there can be cons to paying in cash also. It all depends where you are getting the cash from to do so. Withdrawing from a high interest investment account or RRSP or something like that may bring on penalties for early withdrawals. Experts suggest you measure the loss in compound interest that the money would have earned had it been left in the bank plus the penalties against the cost of an equal loan from your bank. Be sure to analyse all these factors in deciding the best option for where the cash comes from.
This is the avenue a lot of people will take either partially or fully financing their home reno with their credit cards. There can be advantages to doing so to. Using your credit card to pay gives you the ability to pay a minimum payment each month for the costs as you go. Or you have the ability to make larger payments as you wish but it all can be budgeted much easier. A lot of credit cards now days have an added perk such as air miles and cash back, etc. If you are paying for the whole reno using your credit card it will help you to get these added rewards faster and maybe accelerate that family vacation you have been planning.
Paying with a credit card also helps you to keep track of the spending you are doing so that you can keep track of how much the projects are costing you compared to the budget you have set for them.
There are also disadvantages to paying with credit cards. For example most credit cards run with a higher interest than bank loans. While paying for the reno with plastic might make it a quicker process, it might cost you more in the long run, especially if it sends you down a long-term debt spiral.
Another way to finance your home reno would be to go to the Bank and get a loan. All you need to do is apply for a loan that covers the cost of your renovation, and if you get approved you have access to that money a lot like if it was cash. You can incorporate this into your budget and see the true cost a lot easier as you will have money debited from your account each month to cover the minimum payment and the interest for that time period. You will also know exactly when the loan will be paid off a lot better than if you had paid using a credit card. Experts suggest If possible to get a loan that gives you the ability to make weekly payments as it will help you to get the loan paid off quicker.
Bank loans tend to have lower interest rates than a credit card and help your credit rating showing regular payments being made on time. It will also help you to develop a relationship with your bank helping in the future if you require more credit from them for something else.
Personal Line of Credit
A Personal Line of Credit can be a helpful financial tool for homeowners as they move forward not only with their home renovation, but also with other unexpected home expenses that can arise. Personal Lines of Credit or PLC for short give you flexible repayment terms allowing you to make multiple payments a month if you feel like doing so. You can decide on either a fixed or variable interest rate and unlike a bank loan where you will be paying interest on the full amount right from the get go you will only pay interest on the amount you have used, making this a great way to fund a pay as you go type of renovation. Interest rates can often be lower than a regular bank loan and even once you pay off your renovation you will have access to the money in your line of credit for future projects or unexpected expenses that may arise.
Home Equity Line of Credit
A Home Equity Line of Credit or H.E.L.O.C for short is similar to a personal line of credit where it gives you access to a set amount of money where you only pay interest on the amount you have used. The repayment terms are the same but often they will come with a lower interest rate. This type of loan uses your homes equity as collateral (accessed value of your home – remaining mortgage). The biggest risk with this type of loan is that it comes with the risk of losing your home to the bank if you default since you are using your home as collateral.
Refinance Your Mortgage
Finally the last way you can gather the funds to finance your home renovation is by refinancing your mortgage. What this is in essence doing is writing a new mortgage up that pays off your existing mortgage and adds more to include the costs of your renovation. While this might make sense to do if this is your dream home and you plan on living there for the rest of your life, it can also lengthen the amount of time it will take for you to fully own your home.
There can be costs associated with this option such as legal fees to rewrite your mortgage, fees to have your home appraised and maybe penalties for getting out of your existing mortgage early. One way to combat these costs is to add additional funds when you are renewing your mortgage or when you are first buying your new home.
We hope these brief explanations on different ways to finance your home renovation have helped you. Check back next week as we tackle “Working with a Renovating Professional”. Do you have any other tips on financing your home renovation? Feel free to share them in the comments below.
Week Two: Working with a Renovating Professional
Week Three – Avoiding Getting Ripped Off
Week Four: Getting a Return on your Renovation Costs