There are plenty of options when it comes to financing the next major renovation. Start off by determining the estimated cost of your renovation, consulting with a professional mortgage broker or lender, and doing your research on using your home equity to invest in a renovation that will ultimately increase the value of your property.
Not too long ago, if you wanted to take out a loan to pay for a major home improvement project you had to go to the bank or a big lender, apply for the loan and hope for the best. Now there are more options for financing home renovations including refinancing your mortgage, taking out a line of credit from your home equity, and multitudes of loan options.
How much will it cost?
The first thing you need to do is get a quote from a renovation company or a contractor so you know how much you will need to pay for the renovation. A reputable contractor will give you an accurate estimate of what the project will cost. Whatever they quote you, add an extra 10 percent for unexpected costs just in case. You can find an accredited company on the RenovationFind directory.
If you plan on doing the work yourself, you’ll have to determine how much materials, supplies and tools will cost. Add an extra 30 percent on top of that as you will likely have more surprise costs to see the project to completion.
Mortgages & Loans
If you plan on borrowing against your mortgage, the first step would be to contact a mortgage broker you trust and get professional advice. They will be able to show you a variety of products, some that might combine both mortgages and a line of credit. There are literally hundreds of loan loan options out there. They will help you determine which best suits your borrowing needs and financial situation and show you through the application process.
Tips from House Logic
Determine your loan-to-value ratio which is a percentage of the appraisal value of your home. The lender can help you with this. Usually the limit is 80 percent. Lenders will subtract the mortgage balance from the maximum amount that is determined you can borrow. Learn more about loan-to-value here.
- Your house payments and other debt should remain below 36 percent of your gross monthly income.
- Your house payment should be no more than 28 percent of your gross monthly income including interest, taxes and insurance.
- The less interest you pay, the more loan you can afford. Ask about variable mortage rates.
- The longer the loan, the lower the monthly payment – but this means the interest overall will be much higher. If you can afford it, have a shorter loan period as you’ll save thousands by the end of your term.
Home Equity to Pay for Renovation
How would using your home equity be advantageous to financing your renovation? Let’s say you take out $85,000 from your equity to do a major home renovation. Some lenders will let you borrow it from a home equity line of credit. Instead of paying a credit card interest rate of 18 to 22 percent you could be paying an interest rate as low as three or four percent, depending on market rates which for the time being are relatively low.
You might also have the option to take out a little bit at a time as you need it throughout your renovation rather than taking out the full $85, 000 at once and having to pay full interest on that large amount. By taking out smaller increments has you need it, and over a period of time, you will save in interest.
Once your renovations are finished the final amount you owe will be put together with your mortgage at a better interest rate and with a comfortable payment plan. You can start searching for these types of options at your bank or credit union as they’ll usually offer lower rates.
If you wish to refinance your mortgage or get a second mortgage, you need to consult a professional mortgage broker for advice as they will be able to present you with a variety of options. Make sure you do a background check on the mortgage broker you choose. Check references and reviews and go with a broker with a proven, trustworthy reputation.
Enhance Renovation Investments
Do some research and learn which home renovations will give you a greater return on your investment than others. For example, kitchen renovations can recuperate a large percent of the money you spent on it, whereas a bedroom renovation might not increase the total value of your property as much.
You can learn which renovations have the best cost versus return from Remodeling Magazine’s Cost VS. Value annual reports.
Get Started with RenovationFind.com!
RenovationFind.com offers a full directory of renovation companies, trades and contractors that have all been through a stringent screening process. The contractors on our directory have had full legal and financial background checks, check for proper business licenses and insurance, consumer complaints, Workers Compensation Coverage, and Better Business Bureau membership. They will provide you with accurate quotes, quality workmanship and exceptional customer service!
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