Renovations, repairs, and general construction can be quite costly. Many homeowners may find themselves unable to start or complete their home projects due to a lack of cash on hand to finance the project. If you are in a situation where you are lacking funds for your home base project, you do not have to postpone it until you have enough money because there are numerous ways to finance your project.
Home Project Financing Options:
- Mortgage Refinance
- Home Equity Loan
- Home Equity Line of Credit (HELOC)
- Personal Loans
- Credit Cards
All of the tools mentioned above are good options to finance your home base project. They all have different structures, which means that you may be able to find a financing option that fits your situation best. They usually differ by interest rate, loan term, the application process, and applicable restrictions. For example, a mortgage refinance may have a lower interest rate than a credit card, but it is much easier to get a credit card rather than refinance your home. The following page provides an overview of every available option to finance your project.
Mortgage Refinance
If you still have an outstanding balance on your mortgage, you could cash-out refinance your mortgage to get some money now and pay it off with the mortgage. Mortgage refinancing means that a borrower with an outstanding mortgage gets another mortgage for a larger amount and pays off the previous mortgage. The difference between the mortgages is approximately how much a borrower receives in cash. There is a limit to how much you can get with a mortgage refinance. Usually, lenders are willing to refinance a mortgage for a loan-to-value (LTV) ratio of up to 80%. This means that if you are a recent homebuyer with a mortgage that has a high LTV ratio, you may not be able to use this financing option.
Most of the time, mortgage refinance is used as a home renovation loan for large projects that require a lot of capital. It is also used by people who have a low outstanding balance on their mortgage because of the origination fees associated with refinancing. Origination fees for the refinance is usually around 3% to 6% of the loan amount, which means that the borrower will have to pay 3% to 6% on the outstanding balance, which may be a large expense if the outstanding balance is high.
Home Equity Loan
This product provides a loan against the home equity a borrower may have in their current property. If you own a house but do not have as much equity in the house, a home equity loan may be useful for small projects. Home equity loans usually have a variable interest rate that is around 0.50% higher than the prime rate. This means that a borrower with a home equity loan should be aware of prime rate fluctuations happening in the market because they will impact the interest rate the borrower has to pay. In addition to that, home equity loan is usually offered when the LTV ratio of the outstanding mortgage is not higher than 80%.
Home equity loan takes the property as a collateral, which allows the lender to offer a very competitive interest rate. On the other hand, a borrower must be aware of the changes in interest rates and the fact that default may lead to a foreclosure of their home.
Home Equity Line of Credit
Home equity line of credit, also known as HELOC, is a similar product to a home equity loan in a sense that HELOC provides a loan and uses a home equity as a collateral. The difference between the two is that the home equity line of credit provides a credit limit rather than a fixed loan amount. This provides flexibility for the borrower to borrow only as much as they need at a certain time, similar to a credit card. Unlike a credit card, HELOC usually has a competitive interest rate because the loan is secured by the home equity. Usually, HELOC has a limit of combined LTV of 80%. This means that a homeowner will not be able to borrow more than 80% of the home value including the outstanding balance on the mortgage.
Personal Loans
These loans are often unsecured, so they possess a higher interest rate than the options listed above. Personal loans tend to be offered with fixed and variable interest rates, so a borrower can decide what interest rate is best for them. Personal loans tend to have a relatively low limit because it is considered a risky type of loan. Some banks in Canada set the maximum amount for personal loans at $50,000.
This type of home project financing may be useful to people who have a small and relatively cheap project and people who do not have as much home equity to use it as a collateral. Of course, because personal loans are not secured by a collateral, a borrower should expect a higher interest rate than the interest rates for secured loans.
Credit Cards
Credit cards are a very convenient way to receive financing for small projects that do not require that much funds. It is the easiest loan to get approved for even without putting any assets as a collateral. On the other hand, credit cards usually have the highest interest rate among all other financing instruments described above. An average interest rate on a credit card is around 20%, which is much higher than the other options available. Depending on the individual and a credit card, the credit limit can vary greatly, but a regular person should not expect to get approved for a credit limit that is initially higher than $10,000. It is best to avoid credit cards as a primary way of financing a project because it is the most expensive type of debt.
Credit cards are useful for small projects that are relatively cheap. They can also be used as a backup financing option in case a project runs over budget. A borrower does not need any type of assets to put down to get a credit card, but they should make sure to avoid carrying credit card debt because it is expensive. A borrower who knows how to use a credit card may avoid paying interest on their credit card charges and receive some benefits such as cash back or bonus points.
What Option Is Best for You?
There is no ideal financing option that will fit everyone. Depending on your situation, you may be inclined to choose one specific option. For example, if you are planning to make a large investment into your property that you almost paid off, you can refinance your mortgage at very competitive rates. On the other hand, if you do not have that much equity in the property and you need to repair a porch, a personal loan may be a better financing option. Usually, it is best to avoid financing options that have a high interest rate, but some construction stores offer their own loans that may be very affordable in the short term. In addition to that, some short-term financing options provide flexibility to monthly payments, which may be favorable by some people. You should choose a financing option that you are comfortable with and that fits your financial situation.
