Home Improvement Loans: Everything You Need To Know
Are you thinking of making a general improvement or renovating a fixer-upper home?
Home renovations can increase the value or habitability of your home. But remodelling projects can be pricey depending on the scale, labour, type of home, permits, and cost of materials. For these reasons, many people consider financing options for home improvements.
- Cash-out mortgage refinancing
If you already have an existing mortgage, you may consider cash-out mortgage refinancing. To qualify, you have to refinance the existing mortgage for more than the current one you owe. You can obtain more cash if you have owned the property for a long time. That is because your equity on it will be more. Another thing that may qualify you for more cash is when the present home's value is higher than when you purchased it.
The benefits of considering this option are:
- You decide how to use the money – Cash-out mortgage refinancing pays you a lump sum. As a result, you can choose how to use it on your home improvement project.
- Low-interest rates – The interest rate here is low because it uses your existing asset as collateral.
- Boost the property's value – You can perform home improvement projects that will boost the property's value to outweigh the loan's cost.
- Credit card
Credit cards are good options if you want to conduct smaller, short-term projects. Be aware that the interest rates are high, and some require repayment within a short time.
The benefits of using credit cards are:
- Smaller payments – Credit cards allow minimum payments if you cannot afford the total monthly balance. There is also an option of making more than one payment each month. Doing so will boost your credit score.
- Low annual percentage rate (APR) promotion – Some cards offer low APR promotion. That will give you low-interest rates. However, it would not be as low as other options.
- Credit card rewards – You can also get credit card rewards if you repay the borrowed amount regularly.
- Home equity line of credit (HELOC)
A HELOC is a popular home improvement financing option. You can use the equity on your home to get money for your renovation. At least 20% equity on the property is required by most lenders to qualify.
Your lender will also look at the home's market value. It is more beneficial if the current home's value is higher than the value at purchase.
The benefits of using this option are:
- You can build more equity if you perform improvements that raise the home's value.
- The funds are flexible and convenient.
- A HELOC is a revolving credit you can use when it falls within the withdrawal period.
- Unsecured personal loan
Unsecured personal loans are easier to assess, provided you have steady employment, income, and a good credit score. Approach the lenders and go through the terms and conditions. If favourable, you can get the loan and make payments based on the agreement.
The benefits here are:
- The process is fast.
- It requires no collateral.
- The interest rates are generally affordable if your credit score is strong.
Eligibility requirements for home improvement loans
Most lenders are willing to approve your loan if you can prove you will repay it. To get a larger loan with lower rates, you need the following:
- Low debt-to-income ratio – Ensure that you pay off other smaller debts so you can have a lower debt-to-income ratio.
- High income – The higher your income the better chance you have of receiving the loan. You can consider getting extra gigs to boost your household income if needed.
- Collateral – Some lenders require that you provide an existing asset to serve as collateral.
- Employment – Lenders will be more willing to finance your home improvements if you have a stable job and income.
How to choose the best home improvement loan
Before you decide on a financing option, determine the total cost of the project and the expected value the renovation will add to your home. It is also essential to know the timeframe in which you will require funds.
Things to check before choosing a financing option are eligibility requirements, term length, loan amount, and interest rates. All these are vital in deciding the ideal loan for your home and a mortgage broker can assist you free of charge.
The bottom line
It is essential to know that home renovation is not tax-deductible in Canada. However, you may obtain tax credits. Canadians have a nationwide tax credit with a value of 20% for amounts above $2,500. You can also add your home renovation costs to the mortgage if you intend to purchase a home that requires improvements.
Authored by Leenan Homes, a team of architects, designers, construction professionals and real estate industry experts based out of Regina Saskatchewan. For more information about remodelling or constructing a home, visit leenanhomes.com.