How to finance a home renovation

While carrying out renovations on your home can be a daunting task, finding the money to finance it doesn’t have to be.

There are plenty of financing options available to help with your home renovation. The right one for you will depend on how much you need to borrow and how quickly you want to pay it off.

Brent Differ, Financial Advice Leader at Assiniboine Credit Union, offers some practical advice. “The first thing you should do is get quotes from multiple contractors, so you know the fair market value of the work you’re getting done. Renovation work can often go over budget, so it’s good to find a flexible financial solution.”

Once you’ve got a budget and timelines in mind, consider these six financing options and advice to help make the right decision.

1. Home equity lines of credit (HELOCs)

The main advantages of a HELOC is the flexibility and low rates (typically 1% above the prime rate). In addition, you will only pay interest on the amount you withdraw, making this a good option if you need to pay for your renovations in stages.

Keep in mind that there will also be some legal costs involved and you may need to pay for a home appraisal.

Brent says:

The main disadvantage of a HELOC is that there is no fixed repayment schedule. You have to pay a minimum of the interest every month and this will increase if prime rates go up.”

2. Mortgage refinance

This is a good option if you want to make smaller monthly repayments. You would add the amount of the renovation loan to your mortgage and you pay it off over the same time frame.

Given the potentially long amortization period, you could end up paying considerably more interest with a mortgage refinance compared with other options, and the costs associated with a HELOC will also apply.

Brent says:

A mortgage refinance is effectively a new mortgage, and the interest rate could be higher than your current one. It can still be a great option to consider, but be aware that you’ll be paying that interest on the whole mortgage, not just the extra needed for renovations.”

3. Home equity loan

This flexible option allows you to borrow based on your home’s equity with a repayment schedule over a fixed period of time. Rates and set-up costs are typically the same as would pay for a HELOC and you can pay off the loan early with no penalty.

Brent says:

Some of our customers will start their renovations with a HELOC and then switch to a home equity loan once all the costs are confirmed.”

4. Personal loan

This can be a good option for medium-sized projects. Personal loans are quick to arrange and have a set repayment schedule.

Brent says:

Personal loan rates are typically higher than with HELOCs — typically, prime plus 3%. And they usually have shorter-term periods of five years or less, which means higher repayment amounts.”

Related: Is it cheaper to borrow with a loan or a credit card?

5. Credit cards

With credit cards, the main downside is the interest rate can typically range between 12% to 20%, so you’ll want to pay the balance off quickly. (However, if you keep your balance at zero each month, you can avoid interest charges. Learn more on credit card interest rates here.)

Brent says:

It is always a good idea to pay for your renovations with a points-earning credit card, but it’s best to then pay that off with money from one of the lower interest finance options.”

Match the financing option to the size of the renovation

With all of these options, how do you narrow down the right one for your situation? As a start, consider the size of your renovation budge

For renovations costing $5,000 or less, a small personal line of credit is flexible and can be paid off quickly.

For projects between $5,000 to $30,000, a personal loan or line of credit are good options. Repayments will be on a scheduled basis, so you know exactly how much you’ll pay and for how long.

For large renovations upwards of $30,000, an equity loan, HELOC, mortgage refinance or a combination of these are great choices. With these options, you’ll take advantage of lower interest rates and you can pay the loan off over a longer period of time.

Get in touch to set up an appointment with an ACU advisor who can walk you through the financing options for your home renovation project.

About Brent Differ

Brent is a Branch Manager at Assiniboine Credit Union. He spends his days serving local residents and buasinesses in his home community – a community abandoned long-ago by all traditional financial institutions.

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