Home renovations, no matter the type, are large and expensive projects, that’s the reality. Many people ask themselves ‘can your mortgage include renovations’? The answer is yes. Often times when homeowners are planning a substantial renovation, they will use their home’s existing equity and their current mortgage as leverage to essentially finance the project. There are three main reasons why people renovate a property, for their own personal enjoyment, to increase its value or to make it easier to sell. Regardless of your circumstances, it is highly advised you understand what exactly this type of borrowing entails and the advantages and disadvantages that it offers. There are various ways that you can structure a loan for home renovation purposes.
Refinancing Your Primary Mortgage
As a homeowner, you may be wondering ‘can I use my mortgage to renovate’ in some way? You can use the equity that you have built up in your home in order to refinance your existing mortgage. With this type of cash-out refinancing, you will negotiate the terms and conditions of your mortgage the same way you did initially. This may be a favorable option if you have considerable equity in your home and an excellent credit rating. On the other hand, if you have a lower amount of equity in your home and a less positive credit score it may not make sense for you as you will likely be faced with an excessive interest rate.
Obtaining a Second Mortgage
In this scenario, you would be taking out a second mortgage which would provide you access to a lump sum of money to finance your renovation. You are borrowing against the existing equity in your home and using your house itself as collateral for the loan. While access to cash may streamline your renovation, you need to be conscious of your current financial situation and make sure you are not overextending yourself. When committing to a second mortgage you will also be responsible for the closing and administrative costs related to the loan itself. Interest rates can be fixed or variable, which is best for you really depends on your personal situation.
Can a Mortgage Include Renovation Costs?
Perhaps you are in the process of purchasing a new home, but you have determined that it will require quite a bit of work before it is move-in ready. It is certainly an option to incorporate the cost of your planned renovations into your mortgage from the onset. You will obviously be facing a larger liability in the long run, but you will secure a lower interest rate than with most other types of borrowing.
Securing a Home Equity Line of Credit
This is a loan that is structured just like a conventional line of credit, however you use your home’s equity to leverage the borrowing. In general, it is possible to gain access to approximately 80% of the equity in your home and this can be used to finance your renovation. A home equity line of credit comes with a preferred interest rate, but they are also subject to set-up costs and legal fees.
We hope that you have found these options for utilizing a home’s mortgage to finance a renovation helpful. Every household, family and project are unique so it is important to fully analyze your options and educate yourself in order to make the best decision.
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