Finance Corner Home Improvement Loans

Finance Corner: Home Improvement Loans

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Any homeowner knows that there are going to be times when improvements should be done to their abode. It might be something as small as a basic cabinet remodelling or as complex as completely rebuilding a garage or replacing an expensive and aged roof. No matter the scale of the project, you want to make sure that you have a good handle on all of your finances before you start exploring colour options, materials and contractor options in your area. You might have stashed away money for these contingencies for a long time, or, more likely, you’re going to need some help with financing.

Table of Contents - Finance Corner: Home Improvement Loans

What you need to know about personalizing your loans

There are many things to know about home improvement loans, but the key thing to remember is that what’s right for one person may not be right for another. It’s up to you to make sure you’re doing all of your research before exploring home improvement loan options. The choices in terms, rates and purposes can be as diverse as the range of projects you’re exploring, so read on for a quick primer on what you should know about the range and diversity of home improvement loans. Additionally, it’s always a good idea to directly contact a financial services professional before making any decisions as they will have a better understanding of your specific situation and parameters for making a decision.

What you need to understand your choices

There are several things that you want to keep in mind when choosing a home improvement loan. First and foremost, what sort of project are you envisioning? The scale of the project can impact the type of financing you want to get – your options might change depending on how serious of a job you’re looking into. The bigger the project, then the higher the likelihood that you’ll need a more in-depth financing option.

All this is to say that you should have a thorough understanding of what it is that you want to do. Make a plan that overtly spells out what you’re looking to do, coupled with cost estimates based on research and discussions with potential contractors. Once you have an idea of this, you’ll have a better understanding of the scale and length of the home improvement loan that you’ll want to target. Later, we’ll take you through some of these options now so that you can have a preliminary understanding.

Always know your financial situation

When you’re looking into a home improvement loan you want to have a solid understanding of your financial picture since this can impact the type of loan you get as well as the overall expenses of it. If you can scrape together a significant amount of cash, even knowing that you’ll require a loan in at least some amount, then you’ll be well on your way to minimizing the amount of additional debt that you’re taking on. You can improve your terms if you can come up with a significant down payment, and you can also shop around for favourable interest rates so don’t be shy about doing your homework on loan options. You might be leaving money on the table in some scenarios, and nobody wants to look back on a loan situation with anything resembling regret.

Consider how long you’ll be in the home

There are a few other factors that you want to consider if you’re looking into a home improvement project. You should consider how long you’ll be living in the house – if you’re going to be leaving in two years, then it might not make sense to look into replacing a roof that will likely still last for five to seven years. However, you might be getting ready to sell and want to increase the home’s curb appeal – at that point, it could be a good call to look into a home improvement project that will significantly boost the appeal and resale value of the home.

However, the caveat is to make sure you’re putting your money into projects that offer the best potential payback – there is a wealth of information on this topic elsewhere on the web. However, some of the best bets for getting your money back at sale time are renovating the kitchen and bathroom and painting the inside or the outside of the building. Finally, you also want to make sure your home is up to par with its neighbours since that can throw potential buyers off if your house sticks out like a sore thumb in your neighbourhood.

Financing for small home improvement projects

Many of our readers find that they might not even need a home improvement loan – the loan approval process is simply too much for what they want to utilize the money for. For this discussion, we’ll define a small home improvement project as approximately $5,000 or less. If your project meets this criterion then it’s within your best interests to use either cash savings or to put the project’s expenses on a credit card that you can pay off over time. Planning can give you some lead time to limit discretionary purchases and start building up the cash reserves to pay for these renovations out of savings, which is always preferable. Cash payments, of course, eliminate the possibility of paying additional money via interest.

You can still explore a home improvement loan, but it might just be worth it to use a small-scale payment option instead to decrease the headaches. You, of course, want to make sure you’re using a card with a very low or non-existent interest rate, so it might make sense to time a home improvement project with the opening of a new line of credit that you might have been planning on anyways.

A line of credit to make your home greener

An increasingly popular route that homeowners take is to make their homes greener – more sustainable and more environmentally friendly. Doing this can take many forms, of course – you might be looking into installing solar panels or switching to energy-efficient appliances that reduce your impact on the power grid. This scenario can come about in several ways – either you’re building a new energy-efficient building for your home or you want to renovate a house before you take up residence. No matter the reason, exploring a home improvement loan to make green improvements to your house is a common choice by homeowners.

Banks and lenders offer a variety of options if you’re going to go this route. A lot of businesses want to incentivize green home improvements and are empowered by the government to sweeten the pot, so be sure to shop around and take advantage of these wherever you can. You may find, for example, that an energy audit entitles you to a discounted rate or a rebate on your line of credit.

Loan options for larger home improvement projects

If your project is to cost over $5,000, then it might be time to explore the possibility of a line of credit or a personal loan to help cover your costs. An “unsecured” loan might be the way to go if the project is still going to be short of a full makeover – perhaps under $50,000 as a general rule of thumb, but everyone’s financial picture can differ. Unsecured loans mean that you don’t need to produce collateral, but the interest rates might not be favourable.

Alternatively, a personal loan gives you the chance to get the money all at once as a lump sum. This can be a good idea if you know exactly what you want to be done and have the appropriate contractors lined up to do the tasks – all you need is the money. A personal loan disburses every cent all at once so you can easily pay the appropriate parties and get everything done all at once. These personal loan options will usually also set you up on a structured repayment plan, which can be a very helpful option as you plan your financial picture over the coming months and years.

This type of immediate disbursement of the funds in full is also the case for a home equity loan, which usually carry fixed interest rates. Again, a fixed interest rate can go a long way in helping you plan your finances over time and repay the loan.

Home equity lines of credit

Another option to consider here is a home equity line of credit, which is usually a better option if your renovations are to be done over a longer period (which typically also means that the project is going to be larger in scale). If that’s the case for your project, then you won’t need the money all at once, and a line of credit can disburse the money over time. It also is usually an adjustable-rate interest loan so it can make planning for the future a bit harder to do.

Home equity lines of credit are structured like standard lines of credit, and you’re borrowing against the equity of your home (your home’s market value, less your current mortgage liability). So, if you’ve been in your home for a short term, chances are that you have not accrued a huge amount of equity, so these loans might not be as large as you thought you originally needed.

Refinancing your primary mortgage

Another option that some homeowners consider is a “cash-out refinance,” which means you’re going through the mortgage lending process again but with some slight tweaks that give you more liquidity to work with towards a home improvement project. The key difference between this and your original mortgage is that after the process you’re going to receive, in cash, any equity that you had accrued in the first mortgage. This is an option that you can put on the table if you already have a decent amount of equity accrued in your home and you have a credit score that is very high and will ensure that lenders see you as a good borrowing option. Refinancing like this will also usually result in a fixed interest rate, which can give you a good amount of insight into your financial picture of the future.

Sweat equity can also pay off

One way that many homeowners find that they can cut costs is good old-fashioned DIY. Putting some sweat equity into your home might be daunting, but it can pay off if you’re handy and do the proper research. Homeowners are increasingly pursuing this option and enlisting the help of friends and family to help out as well. This can result in you not knowing an experienced contractor, of course, so there’s a risk-reward situation to consider before going down this path.

Another thing to consider is that you can use contractors for parts of the job that you might not feel comfortable with. For example, if you’re looking into installing a new fireplace insert that will run on gas, you might feel comfortable doing all of the modifications short of working with the gas line itself. You can expand the opening, shop around for the insert that you need, and even handle the install itself, but still elect to work with a qualified tradesperson to hook it up to your gas line. This can give homeowners the irreplaceable peace of mind that comes with knowing an expert handled some of the more difficult parts of the job.

Final thoughts

There are many different ways that homeowners can elect to finance their home improvements, but the important thing to remember is that every single person’s situation is different. The amount of equity that you have in your home, the amount of cash savings that you have on hand and the interest rates that you feel comfortable paying can all factor into your decision, as can the size of the project that you’re looking to tackle. Make sure you do your research and consider speaking to a financial services expert who can offer advice tailored to your specific wants, needs and challenges and you’ll be far more likely to be content with your ultimate decisions.

At LendCity Mortgages, we understand the importance of your financing needs for investment

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.