A home is not only for comfort but also reflects the owner’s lifestyle and personality. Homeowners, for a better living experience, often remodel or upgrade their houses. House renovations, if properly planned, can increase the sale value.
An effective house renovation turns your house more attractive, more comfortable, and even more classy! Just like the RRSP first-time homebuyer plan eases accessing house ownership, house renovation loans enable the owner to refurbish or upgrade the living place in many contemporary ways. Besides, subscribing to a house renovation loan is an opportunity for the owner to increase the house’s fair market value.
So, let’s jump to the details of home renovation loans, including which are the best house renovation loans and their benefits and drawbacks, all on one page!
When Should I Get A House Renovation Loan?
Secured house renovation loans require assurance of home equity balance. Depending on the home equity, a homeowner can borrow a range of money from the lender for home renovation projects. Several other options are also available if you do not have enough home equity to get a home renovation loan.
However, you should borrow a home equity loan if it reduces long-term costs or adds significant value to the property. Several proven home renovation projects, like front doors, remodels, basements, and bathrooms, have increased the value of existing houses. If anyone wants to sell their home at a higher rate, the home renovation loan should be utilized carefully.
Some renovation projects, like roof repairs, new siding, and updated windows, can save money in the long term and increase the home’s security. So, such small projects are also worthwhile as they are energy efficient.
However, it is advised not to invest excessively in house renovation because of uncertain risks. Identifying the risks of taking a home renovation loan often seems challenging as we don’t know precisely the range of value the renovation projects will add to the property. Hence, be careful before heavily remodeling your home!
What are House Renovation Loans?
In Canada, several home renovation projects are available for homeowners. At the same time, multiple house renovation loans are also accessible for Canadian homeowners to finance home reconstruction projects.
The following five home renovation loans can be evaluated if you consider turning the current living space into your dream home. However, all these loans have distinctive features, benefits, and drawbacks. Suppose you’re looking for any particular home renovation loan that suits you best. In that case, you must consider certain things on which the selected renovation loan will depend. For example, the variables can include your income, the borrowed amount, the current value of your home, interest rates, and so on.
Home equity line of credit (HELOC)
The Home Equity Line of Credit (HELOC) is the most secure form of house renovation loan. In HELOC, the borrower can take the loan based on the available home equity percentage. Now, what is home equity?
Home equity percentage is determined based on the difference between the actual property value and the amount owed to the bank. For example, if your property is worth 500k and you owe 400k to the bank, your home equity will be 100k. However, the fact is, you cannot access the total percentage of your home equity.
The HELOC offers a credit limit based on the percentage of home equity. It means a homeowner can loan a required amount of money within that credit limit, and the payable interest will be based on the amount that has been used.
Another vital point to remember is that for a mortgage, there should be at least 20% home equity to get the home equity line of credit. For standalone HELOCs, you must have at least 35% home equity.
A more significant percentage of home equity will allow the owner to get a larger HELOC loan to cover house renovation projects. Moreover, HELOC is a good option for borrowers because of its lower interest rate.
Home equity loan
A home equity loan is another affordable and secured loan to finance house renovation projects. The home equity loan is slightly different from the HELOC because it offers a fixed amount of money to borrow based on home equity. You can take a home equity loan with lower interest rates, similar to a home equity line of credit.
Suppose you have a more significant home equity percentage. In that case, you will be allowed to borrow a large amount of money to facilitate your home renovation project finance with a substantial upfront payment.
A home equity loan depends on the available home equity percentage. In that case, you must ensure a minimum of 20% home equity to borrow a home equity loan. Otherwise, you will be disqualified!
If you are planning a more significant house renovation project, then mortgage refinancing can be an excellent option. While a mortgage loan assists in buying a home or property, mortgage refinancing enables the borrower to purchase home renovation projects.
In mortgage refinancing, the borrower needs to replace the existing mortgage. The newly replaced mortgage must have a higher value than the previous one. The difference between these two mortgages will be the amount for a house renovation loan under mortgage refinancing.
The mortgage refinancing program often applies penalties or a certain amount of fees. Fees will be applicable for those who want to refinance before the end of their current mortgage term. Some lenders may require a discharge fee if you change your existing lender and refinance your mortgage with another.
Mortgage refinance is an excellent opportunity for house renovation if the property value can be increased more than the purchased amount of the house. It has lower interest rates, and the maximum refinanced mortgage will be 80% of your home’s value.
Personal loans are preferable if you don’t have the minimum home equity balance required to borrow a secured home renovation loan like a HELOC. The personal loan application process is easy and less time-consuming than the home equity loan or HELOC process.
However, interest in personal loans generally remains higher as personal loans are not as secure as home equity loans and HELOCs are. Moreover, interest in personal loans can be higher due to low income or poor credit scores.
A credit card loan can be a good option if the house renovation project requires a small amount of money, like a few thousand dollars. In this case, the interest rate will be higher, and your payback time for the borrowed money will be shorter than other home renovation loans.
There is an option in a credit card loan known as the 21-day grace period, which includes no interest for a few weeks. However, it’s highly recommended to avoid taking credit card loans if the home renovation project is not minor and if the borrower is not ready to repay the loan within a shorter time limit.
Which Is The Best Type Of Loan For House Renovation?
A Home Equity Line of Credit (HELOC) and first mortgage refinancing are the two types of loans that require lower interest and monthly payback. So, in a sense, they are typically cost-effective when it comes to renovating your house. What if you are not qualified for a HELOC or cannot refinance your existing mortgage for a more significant amount of money?
No worries! You still have the option to borrow a home equity loan with a lower interest rate and monthly payment. If your home renovation project needs to be completed urgently, then borrowing a home equity loan will be the best choice after HELOC and mortgage refinancing.
What Are The Pros Of House Renovation Loans?
Secured home renovation loans, like home equity loans or HELOCs, will provide the users with lower interest rates and a flexible payment policy. In HELOC, your interest will be based on the amount that has been used. The HELOC is also open to paying off in full without penalties.
Several house renovation loans have quicker approval processes, like credit card loans and mortgage refinancing. You will also have a shorter-term available with many lenders.
Secured home renovation loans offer the opportunity to borrow a large amount depending on the available home equity percentage. With this, one can significantly increase the value of the existing house and make it more attractive to buyers.
What Are The Cons Of Home Renovation Loans?
Not all home improvement loans are secured, which means several home renovation loans have higher payback systems. Suppose you don’t have enough home equity to get approval for secured house renovation loans. In that case, personal or credit card loans are available, although they are not secured. Such loans can overload you with their high-interest rates and payback policies. On top of that, there are broker or lender fees applicable.
Sometimes, a borrower could be disqualified from granting a home renovation loan due to a lower income source and poor credit card score.
Home renovation loans often require a higher upfront payment, which may add an extra burden on owners.
Home renovation’s consequences are uncertain, meaning renovation may or may not increase the value of the existing home more than its purchase price.
House renovation loans are meant to upgrade the home’s current value and enhance the security for an extended period of time. Despite all the drawbacks, house renovation loans offer excellent opportunities to access an upgraded lifestyle with a magnified living space. I hope you find all your queries on house renovation loans here in this post. Thanks for reading.