Homeowners sometimes struggle to find the perfect home with enough amenities and space in the ideal neighbourhood. The financial limitation of growing families can hinder your real estate options for undersized properties in less-than-ideal locations.
Truth is, a home improvement loan could prove ineffective in terms of purchasing a property in a favourable area at a fraction of the cost. That’s why increasingly more families are turning to a type of loan that allows them to consider larger, lower-priced homes in need of repair. If you happen to be among the people on a budget, understanding how improvement loans work can help you make informed decisions on which property to buy and how to finance the home renovation.
Home Renovation Loan: Short Overview
One of the reasons people opt for renovation loans is to improve their quality of life in their prospective new home through upgrades, improvements and renovations, as well as to increase the value of the property. More often than not, homeowners who purchase less-than-suitable properties often opt for HELOCs in Canada to make cosmetic or structural enhancements before occupying the building. Lending companies may allow you to borrow toward the upgrades and effectively start construction promptly after the closing.
Renovation loans are typically calculated according to the home value after the proposed renovations are completed. That’s what makes loans a preferred resource because the future home value increases once the renovations are over, even though the correct marker value remains relatively lower.
It’s critical for a homeowner to understand the variations between a renovation loan and products that sound alike, such as home improvement loans.
The chance is you’ll be misled into thinking that both loan types offer the same service. Although they’re both used interchangeably, the loan terms, features and requirements are quite different. One way to distinguish, say, renovation from the improvement loan is the future property value aspect.
Home Renovation Loans: how does it work?
If your newly purchased home is in need of upgrades or small improvements, there are different options for loans that you can consider. For example, one of the most common improvement loan options is the single-close one that includes the expenses of a renovation project in the overall loan amount. This loan option is helpful if you need to undergo repairs that an evaluator requires or for upgrades you want to make to increase the value of your home, and it can be used for both structural and cosmetic restorations.
This option appeals to most homeowners because is very simple to qualify for. Typically, the home renovation loan requires one payment per month and has lower premiums and can pay for both the cost of repairs and purchase.
The mortgage term for the renovation loan is between 15 and 30-years. but there are a number of adaptable-rate options that you can choose from. Your final loan amount will be calculated based on your home’s estimated value after the renovation or upgrades are completed.
When Should You Sign for One?
You should consider a renovation loan if you’re convinced that the upgrades will either lower your long-term or increase your home value. Some remodelling projects can skyrocket the value of property by a higher share than what you spend on improvements. Front top remodels, attic, basements and bathroom insulation lead the list for practical home improvements. Thus, make sure you renovate what is necessary if you’re planning to increase the value of your home before selling.
It pays to sign for a renovation loan if some improvements you can make will make your home a more hospitable place or can help you save money in the long run. More often than not, homeowners decide on a renovation loan when they need to upgrade the roof or replace windows to maintain an optimal temperature.
However, signing for a home renovation might be risky if you’re not familiar with the ins and outs of the contract. Make sure you check your equity first. Ensure there’s no risk in agreeing on a loan when you have only a small amount invested in your house.
Another common misstep is funding too much money into your remodelling. You don’t want the upgrades to increase the price of your home and make it less affordable when compared to similar properties in your neighbourhood. Look for the highest property prices in your neighbourhood, or you could discover that you’ve actually delayed the marketability of your home by offering more than future home buyers expect.
Lastly, don’t rush your renovation project.. Met a few lenders, research the available rate, and don’t forget that home renovation projects often end up being more time-consuming and costly than you might think. Take your time to ensure your current financial situation allows you to sign for another home loan.
Other options
If you’re planning for a home renovation project but you’re on a budget, you can sign for a special no-interest period with your credit card and substitute your full renovation loan.
Keeping your project expenses on a different credit card will make it easier to separate those costs from your normal spending. You should avoid using your credit card for other expenses than that so you can repay the balance in time.
Another alternative to home renovation loans is the cash-out option which requires you to finance your actual mortgage at a higher loan amount and use the extra funds for a renovation. This option would be viable if you have at least 20% equity, a good credit history, and a low premium. Research current rates, lending companies and your property’s equity before opting for a refinance.
However, as with everything in real estate, the best option for you will depend on your current financial situation and unique needs. If you’re in need of urgent repairs, the closing rates and lower rates of a renovation loan make the most sense. On the other hand, if your home equity is strong enough it pays to take advantage of the current market to upraise the value of your property.