Guest Blogger: How to Know if Financing your Home Renovation is a Good Option

Guest Blogger #366, Entry #949, February 9, 2012

Home renovation projects represent a method to increase your home’s equity in a significant manner. Many home renovation projects pay for themselves by increasing the home value in relationship to the cost of the home improvement. They can also be an effective way to make your home more attractive to potential buyers if you are looking to sell your home.

As positive as the renovation outcomes look in the end, they are often complicated and time-consuming. That’s why it’s important to carefully analyze what the renovation will entail and assess a realistic figure that is needed to finance the project. After this number is determined, you can explore the options that are available to help you finance your home renovation project.

If considering a remodel, how will you pay for it?

Image via: Design Sponge

Home Equity Loan

A home equity loan will tap into the amount of equity that you currently have in your home. You will borrow against this equity to receive the loan for the specified amount that you request. Current average home equity loans are 5.99% in America. Average mortgage rates in Canada for a five year fixed closed home equity loan is 3.39%. Mortgage rates can be higher or lower depending on a consumer’s spending. Variable rates are often based on the prime rate, such as Canada’s current prime rate of 3.0%.

Home Equity Line of Credit

A home equity line of credit is also secured by your home’s equity. The HELOC will typically be available to you for a variety of projects. You only pay interest on the amount that you charge to the line of credit, letting you have access to the funds if you need them, but you will not be billed until you incur charges on the account. Home equity lines of credit typically include a lower interest rate. For example, the average HELOC rate in the United States is currently 4.67% and is 3.0% in Canada.

Refinancing Your Mortgage

Another way to finance your home renovation project is to refinance your existing mortgage. This option is attractive because it does not require you to get a second loan on your home like you would require with a home equity loan. You can typically be expected to pay some upfront costs to refinance your mortgage, but then you can spread out the amount of payments over several years to have more manageable payments.

A home refinance may help you with your remodel

Image via: Laura Casey Interiors

Personal Loan

If your home renovation project is not extensive, or you do not want to tie up your assets with a home equity project a personal loan may be a good option. While the interest rate is typically higher for an unsecured loan is often higher, you can pay it off within a short period of time without having to use collateral.

Home renovation projects can add value to a home. Several options are available to help you finance the cost of the home improvement project that offer their own set of benefits and detriments that should be carefully assessed before making a final decision.

Samantha Kemp has a degree in economics and business. She has written extensively regarding home renovation projects, personal finance and home decor.

For more home renovation ideas on Stagetecture, click here.