The reasons for undertaking home renovations are varied. Many homeowners want to modernize or update the look of their homes for their own comfort and enjoyment. Some, rightly, view their home as an investments and want to increase the resale value of their home should they decide to sell. In today’s environmentally-conscious times, many homeowners are now undertaking Home remodel to increase the energy efficiency of a house. Their investment in home renovations converts into a smaller “carbon footprint” and long-term savings in energy consumption and costs.

Whatever the reason, homeowners planning home renovations should consider both their costs and their financing optionsΒ beforeΒ beginning their project.

Options for Financing Home Renovations

As with any investment, the financing option you choose depends on the size of the project and your current financial situation. Financing options can range from dipping into your pocket or savings and paying cash for smaller projects such as painting and wallpapering, to tapping into a line of credit, taking out a line of credit or even refinancing a mortgage for larger renovations that can range from bathroom do-overs to adding additions to existing homes.

Here are some of the more common options for financing home renovations, both large and small:

Financing Minor Home Renovations

Self-Financing – This option makes sense for smaller projects. It is also a feasible option for do-it-yourselfers on a pay-as-you-go (or pay-as-you-build) plan.

Credit Cards – Charging large expenses to a credit card is an option, but not necessarily a good one. With their higher interest rates, credit cards have limited value in home renovation projects, and can be damaging to your financial health if there are unexpected cost overruns. (A do-it-yourself installation of a tub surround in your bathroom can turn expensive if your plumbing skills are not as honed as you would have liked them to be and you notice water dripping through your living room ceiling!)

Loans and Lines of Credit – These are popular options that offer interest rates substantially lower than those charged for credit cards, but often higher than those of home equity loans. One disadvantage of personal loans is that once they are repaid you need to reapply to obtain more funding. Lines of credit are ongoing, up to the credit limit, so there is no need to reapply if you need more funds. (A line of credit with room on it above and beyond the cost or the renovation will come in handy on a plumbing job gone bad – see above.)

Financing Major Home Renovations

Home Equity Loans – These loans allow you to leverage the equity in your home. They are often used to fund major renovations because they offer the needed capital at a much lower interest rate than credit cards or other types of loans. Typically a home equity loan, which can be structured as a line of credit secured against your home’s existing equity, is limited to 80% of your home’s value, but a mortgage broker can often work for you to secure loans of up to 95% of your home’s value. With home equity loans, there may be some setup costs, but like lines of credit, there is room to allow for cost overruns and unexpected expenses.

Mortgage Refinancing – If you are planning major renovations, like adding an addition or in-law suite, it may pay to refinance your mortgage. With this option you can spread the payments out over a longer period and enjoy mortgage rates that are normally much lower than those of credit cards, lines of credit or personal loans. As with home equity loans, there may be some initial fees to refinance.

By Olivia

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