You may walk through your home feeling like something is ‘wrong’ with the way it’s designed.

In your mind’s eye, you can picture how more appealing your home would be if you could make a few facelifts to it; and wouldn’t your teenage son be happy to have a renovated basement all to himself?

Adding a new bathroom, creating a sanctuary within your home space and making your home more environmentally friendly are grand ideas that can only be made possible if you have the monetary requirements.

How Can You Fund these Home Renovation Plans?

You have the following options to fund your home renovation plans:

·        Remortgaging/Refinancing

·        Home Equity Line of Credit (HELOC)

·        A Second Mortgage

Which of these options is the best for you?

When to Refinance Your Current Mortgage

Refinancing can be a good idea, or UK remortgaging can work if you know the exact amount of money required for home renovation. It is smart to take equity out of your home this way, if the penalty for breaking up the 1st mortgage terms isn’t harsh.

When you change the terms of your mortgage, you can then withdraw the remaining amount to give your home a facelift.  The typical question is how much equity in your home you need to refinance. To do this, you typically have paid a good portion of the mortgage so then the ratio of debt to home value is less than 80%. Also if the value of your property has gone up, you may be able to do refinancing.

For example, if your property is valued at $700,000 and you have an outstanding mortgage of $300,000; you might be able to change the mortgage terms such that you borrow up to 80% of your home via remortgaging. 

With refinancing, your home is a collateral and this makes the interest rate lower. If you have any other accrued loans or you need to get one soon, refinancing is a good bet.

When to use a Home Equity Line of Credit (HELOC)

Don’t know the exact amount you need to refurbish your home? The HELOC gives you a line of credit with a pre-approved limit (like a credit card) and is more flexible to use than remortgaging.  

Also, you only pay interest on a HELOC if you use it, just like a credit card.

But with a HELOC, the interest rates are higher than mortgage. Also, as soon as you start using it, you have no grace period where you won’t be charged interest, and the terms are shorter. Since HELOC rates are correlated to the central banks benchmark rates (e.g. Fed rate) the HELOC rates went down significantly in 2020. For example now the HELOC rate in Canada is only 2.95%.

When using a HELOC in Canada, you can only borrow up to 65% of your home value, and when combined with a mortgage, your Cumulative Loan to Value (CTLV) must not be higher than 80%. To calculate the eligible HELOC amount that you can get in Canada use the Canada HELOC calculator.  The eligibility amount in the US is different than Canada and can reach the total loan to home value of 90%. 

See the HELOC as that back-up plan that gives you peace of mind if something goes wrong, but don’t spend it on frivolities.

When to Get a 2nd Mortgage

Second mortgages are rarely good choices, as rates are much higher on them than for other plans. If you don’t have enough equity in your home however, you might consider it.

Conclusion

  • Consider refinancing your mortgage if you’ve paid a good portion of your mortgage, if your home value has gone up and if you know exactly how much you need to give your home a facelift.
  • A Home Equity Line of Credit (HELOC) may serve you better if you are unsure of how much your home renovation plans would cost and if you need greater flexibility.
  • Rarely does a 2nd mortgage make sense, but if you don’t have enough home equity, then consider it.