Your house is likely the biggest investment you’ll ever make. You love your home; it’s comfortable and functional. But you can’t help but imagine how that front step would look way better with a nice double-layered deck stretching down to the lawn. And the kitchen seventies’ motif is funky, but you’re ready for a modern look with some new windows for extra light. And you have a feeling that the roof might be ready for some TLC.
Home renovations can add value to your home and add to your personal enjoyment of the space. But renovations are a significant investment of time and money. If you are looking to borrow the money to finance the renovation, there are a range of options, all with their own pros and cons. So, what is the best loan for your project?
Two Big Questions Before You Borrow
An essential first step is to answer two questions: how much and how long? To determine how much money you’ll need to complete your reno, you’ll have to do your research, request estimates, build in wiggle room and space for surprises. The more solid your estimate, the better able you will be to gauge the best loan for your situation. Then, you need to have an honest, general idea of how long you will take to pay back the loan. Whether that period is five years or 25 years, the timeline will impact what kind of loan gives you the best terms. An additional timeline question is whether you need the money all at once for a reno with large immediate costs or if you’ll want to access the funds as you go for a project that will slowly be completed over time.
Cash is King
Of course, the best possible terms you can find are from your own savings. Home renovation projects are usually planned and so a high-interest savings account with a few years of savings could fund your project with zero interest and no opening or closing terms. But sometimes renovations come up as emergencies (if that feeling about your roof came true too soon!) or you need additional funds to match your savings for larger projects. In these cases, you’ll need to pick an option for borrowed funds. Now, let’s focus on loans.
Home Equity Loans
If you’re looking for a large loan, something in the range of $15,000 or more, and need the full loan from Day One of the project, a home equity loan may be the right choice for you. A home equity loan is a loan that is secured by the equity available on your house. For example, if you have paid off $100,000 of your $350,000 mortgage, you can borrow against the $100,000 that you have paid off as your equity. The amount you can borrow depends on the percentage of equity allowed by the lending institution, though 80% is a good general estimate. In this example, the eligible 80% would translate into a loan of up to $80,000. The benefit of this loan is that it’s tied to your home, so the banks can provide you with better terms than a personal, unsecured loan. The interest rate is normally set for the entire loan period, making the loan easier to budget for, and the payback period ranges from 15 to 30 years. Unlike mortgage refinancing, normally the home equity loan can have much smaller closing cost, which can make this option appealing.
Another option for projects require a large loan and immediate full access is to refinance your mortgage. This route may be particularly appealing if your home has increased in value or if you are already looking at remortgaging to take advantage of better borrowing terms. As your whole home, not just your home equity, is used as collateral for the loan, you can receive even more favorable borrowing rates than a Home Equity Loan. However, the savings achieved from the improved terms have to outweigh any closing and transferring costs when comparing this option to other loan types.
Home Equity Lines of Credit
If you’re seeking a large loan for your renovation, but you don’t need the money all at once, a Home Equity Line of Credit (HELOC) could be the right fit. The line of credit acts similar to a credit card where you borrow the funds needed only as the costs arise. If you will need smaller amounts of money over a couple years, this option is beneficial as you only pay interest on the money that you have taken out, not of the available total. The HELOC is secured by your home equity in the same way as Home Equity Loan, so you can receive access to a significant amount of capital. You draw from the HELOC for a certain period, generally 5 to 10 years and then the payback period begins, which can range from 15 to 30 years. The downside of the HELOC is that the interest rate is flexible, so future interests costs can fluctuate and cause unexpected increases in borrowing costs.
Personal Home Improvement Loans
For a small to medium sized projects where you would like all the money up-front, a personal home improvement loan is a good option. This loan is simply a personal loan you can request from a creditor without collateral, with terms based on your credit score. As the loan is unsecured, there is a comfort in knowing that your home isn’t at risk if you default on the loan. However, that comfort comes at a price as unsecured loans have higher rates and shorter loan periods, often three to five years. If you have good credit, you can get reasonable rates and an advantage of this loan is that you avoid the closing costs and fees associated with larger equity loans.
Zero Interest Credit Cards
For small projects where you would like the money on an as-needed basis, a zero-interest credit card could be a great option if used with great caution. If you qualify for zero interest, you can use the card’s balance to pay for your project and the credit card will have minimal fees. However, be sure to pay off your balance before the zero interest period expires (often after one year), or else your loan will become very expensive, very quickly.
For every kind of loan listed above, there are a variety of creditors who offer a range of loan sizes and terms. Compare rates, opening and closing fees of each company and read the fine print. In addition, be wary of borrowing all the money you are offered. Though tempting to add the bells and whistles to your renovation, limiting your loan size to your planned amount will save you a lot of money in the long run.
What’s the Best Loan For Me?
With a clear understanding of your renovation costs and timeline, as well as your loan repayment timeline, it will become clear which type of loan is the best fit for your home renovation and financial situation. For each combination, there’s a loan available to you. Once you pick your loan type, you can shop around for the best terms for your loan and then, the renovation fun will begin!