Using Mortgage Financing to Fund Your Renovations
Whether you need to do renovations in order to make your house more attractive to buyers, or you're buying a house and want to improve some aspect of it, sometimes it's a bit of a struggle to come up with the funding to cover the work. On our podcast, All Things Renovation, we interviewed top-performing mortgage broker Krista Klein. Here is a summary of the tips that we learned from her.
Why choose a mortgage broker instead of a bank?
You want to work with someone who has your best interests at heart and is able to get your deal done. When you work with a bank, you only get that one person's perspective and they only follows their banks' rules. On the other hand, a mortgage broker has access to lots of different lenders that you might be unaware of. This is especially important in more complicated mortgage situations.
What exactly is home equity?
Home equity is the property’s current market value (less any liens that are attached to that property). The home's value will fluctuate over time as mortgage payments are made and as the real estate market affects the current value of the property.
What are some scenarios where someone could use mortgage financing to fund their renovations?
You’re a first time homebuyer and you’re buying your very first condo. You want to be able to do a quick renovation on it.
Purchase Plus Improvements program
The lender will approve you for the amount of the renovation, but you have to complete the work before the lender gives you the money. If you don’t have that amount of money available in cash, you can go to the bank and get approved for a Line of Credit (LOC). They will accept a contractor’s quote or your own quote if you’re going the DIY route. At the end, the lender will get an updated appraisal to make sure everything was completed. Then they will give you the money and you can then pay off the Line of Credit.
If you currently own your home, you want to pull out equity from your home, and you currently have a mortgage.
Get a Home Equity Line of Credit (HELOC) - When it’s at $0, you don’t pay any interest on it. As you start to use it, you pay interest on it, but you can pay it back down to zero. This is a good option for renovations that you plan to do in the future because you don’t pay any interest on it in the meantime.
Increase your existing mortgage - If you’re planning on doing renovations really soon and you’re really organized, it might make sense to increase your mortgage.
Look at the interest rate differences:
HELOCs are usually Prime+0.5%.
Mortgage interest rates vary with time.
You don’t have a lot of equity in your home, but you want to do a renovation.
Refinancing Plus Improvements programThe lender bases your loan on the future value of the property. You won’t receive the money until after the renovation is done so you need to show that you can afford the renovation upfront. Up to 80% of your home's value can be refinanced.
You have a primary residence but now you want to buy a secondary property and do some improvements.
Refinance your primary residence up to 80% of its value, then use that for the down payment on the secondary property. Use cash for improvements.
Use the Purchase Plus Improvements program to finance the renovations - property values must be less than $1 million.
What about if you want to build a home or do a large ($1 million) renovation?
Construction Financing. This consists of draws, rather than one single lump sum. You will have to pay for and complete a certain percentage of the work before the lender will pay you back. This gets your working capital moving through the project. Sometimes the lender will give you a specific number of draws. A fee will be charged for any draws beyond the set amount. To listen to the interview with Krista Klein, visit www.AllThingsRenovation.com .