Renovating a home can be one of the most fulfilling achievements for a home owner or investor. However, when things go wrong (as they inevitably do) your renovations can turn into a financial nightmare. Taking out a home renovation loan that is tailored to your needs can be one of the most astute financial decisions you will ever make.
Understanding which home renovation loan best suits your project is the first step toward a successful outcome. The ‘plan’ in financial plan is more than just an idea; it’s an essential factor in making sure you add maximum value to your premises. Unless you have savings set aside for your home renovation, you need to understand what type of loan best suits you.
It’s a sensible first step to talk to your lender prior to making a detailed plan. Provide your lender with a general idea of your aspirations, along with details of your present financial circumstances including fluid savings and accumulated assets. Your financier will then be able to give you an idea of your borrowing power, and arrange pre-approval for your loan. Once you know exactly how much you can spend you will be able to enter into discussions with your chosen builder.
There are several different options for a home renovation loan. Here are a few choices to get you started.
Personal Line of Credit
This loan type is very popular for smaller projects and also ideal for long-term renovations carried out over time. A single loan application allows you to access revolving credit as you need it until you reach your credit limit. By keeping tabs on monthly statements you will be on top of expenses and you will only be paying interest on funds you have used. In other words, if you have a $20,000 personal line of credit but have only used $5,000, you will only be paying interest on the $5,000. Another benefit is that as your credit balance is paid off, you can re-borrow without reapplying for another separate loan.
A personal line of credit is similar to the credit facility on your regular bank transaction account, but usually attracts a lower interest rate. It’s pre-approved against your accrued savings.
A Personal Loan
A personal loan for a home renovation project carries the same stipulations as any other personal loan. Regular payments are made according to fixed or variable interest rates, with the loan typically extending from between one to five years. If you require more credit once the loan is paid off you will need to re-apply for a new loan. Taking out a personal loan remains the first choice for many renovators: the repayment schedule is regular, and the risk of overspending is greatly reduced.
Re-financing your existing home loan
If you are planning a major renovation and need to spread repayments over a longer period, re-financing could be the most sensible option. You could be approved to borrow up to 90 percent of your home’s value (minus your outstanding mortgage balance). Mortgage rates are usually much lower than credit card and other loan rates, meaning you will pay less interest. There is also the option to pay mortgage insurance upfront to safeguard against unforeseen circumstances.
Using your Home Equity
If you have owned your home for some years you will have noticed its increased value. An equity loan allows you to borrow against the increased value of your premises, and is a sensible way to finance major renovations. Re-investing potential profits into your home renovation is economical and often comes with preferential interest rates. A home equity loan usually incurs no cost apart from legal and appraisal fees.
By discussing the options with your preferred lender, you will be able to commence work on your dream home renovation project without unnecessary anxiety regarding your home ownership – which is after all, the most significant investment move most of us will ever make.