Financing a home renovation

Renovating your house -- whether it’s building an addition, giving the kitchen a facelift or finishing the basement -- adds to your quality of life and increases the resale value of your home. Renovations can cost tens of thousands of dollars, and there are several financing options available. The one you choose depends on a number of factors:

  • How much you need to borrow.
  • How much equity you currently have in your home.
  • Whether you need the money all at once or would prefer to draw on it as necessary.
  • Whether you want to make amortized payments or follow a more flexible schedule.
  • Your comfort level with placing a second mortgage on your home.

Your first step should be getting pre-approved by a lender so you’ll know exactly how much you have to spend. When you talk to contractors, give them a budget of about 10 percent less than you’ve been approved for, in case there are additional costs later.

Here are financing options:

Refinancing your mortgage is an option to consider if you’ve already built some equity in your home and you’re planning a major renovation. For example, if you want to borrow $30,000 to build an addition and you have $120,000 left to pay on a $200,000 mortgage, you may be able to take cash out by raising the principal on your mortgage to $150,000. This would allow you to pay for the entire renovation up front. Depending on the terms, your monthly mortgage payment might remain the same; only the length of the loan will be extended. If you’re adding something structural (as opposed to simply redecorating) lenders may approve you based on the projected value of your home after the project is complete.

A home equity loan works much like a conventional first mortgage. You borrow a lump sum that is secured against your home, and the payments are amortized over several years. Usually, the interest rate and monthly payment remain fixed throughout the term of the loan. This option requires an additional payment on top of your first mortgage and usually carries a higher interest rate than refinancing your mortgage. However, the closing costs may be lower and it can be right if you don’t want to refinance and you need the money for your renovation all at once.

A home equity line of credit (HELOC) is a good choice if you’ll be paying for your project in stages. With this option, the lender agrees to advance you money up to a specified limit, and you access the money as needed with a credit card or checkbook, making it easy to pay contractors. Monthly payments can be lower than those of a home equity loan, since you have the option of paying interest only on the money you withdraw. The other important difference is that HELOCs carry adjustable interest rates, while home equity loans typically have fixed rates.

A personal loan or line of credit may be all you need for a smaller project. The fees to set these up can be lower than those for refinancing your mortgage or tapping your home’s equity. The drawbacks? Personal loans are not secured with your home, so they carry a higher interest rate. But depending on the rate, they may still be more favorable than using a credit card. In addition, interest on your mortgage or home equity loan may be tax deductible whereas interest on a personal loan is not. Always consult a tax advisor about your particular situation.


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