Home renovations can put a dent in your savings. And you may wonder if it is possible to invest in remodeling your home without dipping into your rainy-day fund.
Financing your home renovation means you can pay off the cost of your renovations over time, rather than finding the money right away. The most secure way to invest in your property is to obtain a home improvement loan through RBC or another trusted financial institution.
Here’s what you need to know about financing your home renovation and the various loan options available.
Before you begin
Think about whether you want to use your home equity to secure financing. An RBC mortgage can accommodate improvements to your home, consolidating investments in house repairs, remodeling, and renovations.
Alternatively, you may wish to use a personal loan or line of credit to get the home renovation money you need without putting your property up as collateral. However, financing a remodel without equity on your home often means less flexibility in payment schedules and limited cash up-front.
It’s crucial to carefully consider your mortgage payments, current financial situation, and your investments when deciding how to finance your home renovation.
Here are ways homeowners can finance their remodels:
Take out a second mortgage
Putting a second mortgage on your home, also known as a mortgage add-on or home equity loan, can supply cash for an extensive renovation. This is often the best loan for a home addition, or a similarly expensive project. It is important to understand that a second mortgage must be paid off in addition to your current mortgage—if you cannot meet your financial obligations, you may risk losing your home.
Because a second mortgage places so much on the line, specific guidelines have been developed. The maximum amount available for your home renovation loan is based on your assets and your current financial obligations. According to the government of Canada, you can borrow up to 80 per cent of your home’s appraised value minus the balance of your current mortgage and any liens on your home.
Below, we’ll go over the four steps for calculating the likely value of your home equity loan.
Determine the current value of your home
You can obtain a rough estimate of your home’s market value using an online home value estimator or hire a professional appraiser to get a more precise value. For our example, let’s say your home has a market value of
Calculate 80 per cent of your home’s market value
Eighty per cent of the $200,000 home is $160,000. This is the maximum value of a home equity loan, assuming the first mortgage is fully paid.
Obtain the present balance of your mortgage or any liens
If you still owe money on your current mortgage, this balance figures into the value of your home equity loan. Let’s assume the homeowner still has $60,000 left on their mortgage.
Do the math
You’ll need to subtract the amount in step 3 from the amount in step 2. This gets us the total amount available to borrow on a second mortgage. In our example, it would look like $160,000 – $60,000 = $100,000. Remember that origination fees and other legal fees and closing costs may also apply.
As always, your best bet is to speak to a financial specialist to make the right decision for your situation.
Home equity line of credit (HELOC)
In contrast to a second mortgage, a home equity line of credit has few or no closing costs and variable interest rates. HELOCs are often the best loan for a home remodel with a moderate price tag and a longer completion time. The entire credit amount will be made available to you up-front, and you will only pay interest on the amount you withdraw, giving you greater flexibility in your payment schedule. You can re-borrow and pay down as often as you like within approved credit limits.
A few caveats: taking out a line of credit on your home means that the creditor can put a lien on your property. If you cannot make your minimum monthly payments, you risk losing your house.
You may require legal services (and their associated fees) to register a HELOC. In addition, your payment rates are adjustable and may increase over time.
Wondering how to finance a remodel without equity in your home? This financing option can act as a loan for a house repair too large to put on your credit card but too small to justify a large home improvement loan. It is much faster and more accessible than a HELOC or a home equity loan. However, this type of loan is unsecured. Because you do not need a guarantee or a proof of insurance (like your mortgage), the interest rates are higher, and your payback period will be less flexible.
Personal line of credit
Taking out a personal line of credit can get you renovation funds quickly and without using your home’s equity in any way. However, your credit limit will most likely be lower than a HELOC because there is no collateral put up as a guarantee. Interest rates on your payments will also be higher.
A personal line of credit can be a good option for financing a mid-cost project that will take several years to complete—you can borrow as needed and pay on a flexible schedule. Roof financing is a good example, as roofs may require regular maintenance and repairs over several years. The line of credit can be re-used for future projects. Start the credit line for occasional roof repairs, and you may be able to put it to good use in a doors and windows project or a kitchen remodel in a few years.
What is the best renovation loan for your home improvement project?
Selecting the best home improvement loan or line of credit to finance your home renovation is not a decision to take lightly. The cost of your project, your completion timeline, and your home equity should all be considered when choosing the right financing option for your unique circumstances.
You may be eligible for a publicly funded home improvement loan, subsidy, or tax credit. Explore financing options offered through your municipal office or through federal programs like the Canada Mortgage and Housing Corporation.
Financing a home renovation means making an investment in your future. Ensure that you hire a trusted professionals for the job. You can also calculate the cost of your home renovation project with the Smart Reno cost estimator.
Connect with a financial advisor to learn more
When it comes to homeownership, understanding how you can unlock borrowing options with home equity is more straightforward than maintaining gutters and downspouts. Start by assessing your finances with a professional to determine if using your home equity to borrow is the right path for you. An RBC advisor can help you understand if you qualify and, if so, unlock your home equity when you’re ready. Book an appointment today and get advice suited to your exact needs.
This article was originally published by Smart Reno; you can find the original post here.