Owning your own home can be a dream come true but dealing with home renovations can be quite a nightmare:
- finding the right contractor,
- waiting for the right material to be delivered,
- possibly finding an alternate residence to live in while renos take place, and
- upending your life in general.
On top of all this, you also need to think about how you’re going to finance your home renovations. While we can’t help with the rest (as much as we’d like to), we can show you different ways to finance your home renovation. Let’s get into it!
Ways to pay for your home renovation:
Pay by cash:
Paying for your home renovation in cash is one of the safest ways to finance your home remodelling or repairs. It may also be cheaper in the long run. You see, when you pay by cash you have a limited budget and will have to plan your renovation in such a way that you make every single penny count. All in all, your renovation will be as cost-efficient as possible.
Next, paying by cash ensures that your home is not put up as collateral for any kind of financing. This is a good move because if you end up defaulting on your loan, then you could lose the very house you’re trying to renovate.
Besides forcing you to be economical and keeping your property in your hands, paying by cash also helps you to avoid paying more than you require in terms of interest if you were to take out a loan or line of credit. As a result, the cost of your renovation in the long term would be cheaper as you won’t have to pay any extra amount (over and above what you need). So, paying by cash may not just be safer and cheaper, but even more cost-efficient!
There are multiple ways you can plan for and pay for your home renovation with cash:
Set up a separate savings account: Unless you have an urgent home repair to take care of, you can set a savings goal as your target and keep putting money aside towards your home renovation in a separate savings account. That way, your home renovation fund stays separate. A great way to do this is through a no-fee savings account so that you won’t have to pay any bank fees and can earn interest on your deposit too. When you have enough saved up, you can withdraw your cash. And while you’re saving up you can use the time to research the most cost-effective hacks and tips!
Opt for a fixed deposit: If you know for sure that you can wait a while to renovate your home, then a fixed deposit could be a good option for you. Unlike a savings account, you will not have the flexibility to withdraw your funds at any time (without paying a penalty) but may stand to earn more in terms of interest. Once your term ends, you can use the cash in your fixed deposit and fund your home renovation.
What's an example of a fixed deposit? How about a short-term GIC: GICs, or Guaranteed Investment Certificates, are a type of short-term liquid investment. The benefit of a GIC is that you will get an assured return on your investment. This includes the principal amount for sure, as well as any interest that you earn. They can range from a 1-year term (with a short, closed period after which you can withdraw your cash) and stretch up to three years, five years, or even longer, depending on the type of GIC you pick. It is one of the safest types of investment and can help you grow your savings toward your home renovation without risk.
Cash out your investments:
One of the reasons you invest in different investment instruments is to grow your wealth. Another important reason is that your investments can also act as a safety net, allowing you to cash out when you really need funds. If you think that your home renovations are urgent, or that you would rather cash out your investment than get into debt, then that may be the way to go. Of course, this must be done wisely so that you don’t harm your portfolio or end up paying hefty penalties. Speak to a financial advisor before taking any steps so they can chalk out the best plan for you.
Wait for your next bonus or big business deal:
If you can put off your home renovations for some time and you know you’re up for a big bonus at work, then you can wait until you come into those extra funds. Or, if you’re in business and can expect a seasonal increase in income or have a huge deal in the offing, you can wait till that extra income comes in. Plan your home renovation in such a way that you can make the most of your bonus or big business deal.
Pay for your home renovations with a loan or line of credit:
If you don’t want to save, won’t be able to afford your home renovations just by saving, don’t want to cash out your investments, or find that even cashing out your investments won’t cover your home renovation expenses, then you should consider taking out a loan or a line of credit.
There are different types of loans and credit instruments to fund your home renovations. These include:
Home Equity Line of Credit:
A home equity line of credit (HELOC) is a secured type of loan with your home put up as collateral. It is a revolving line of credit, which means that you can borrow funds, repay your loan, and borrow funds again, as many times as you need. Of course, you can only borrow funds up to a certain credit limit. For example, if your credit limit is $10,000, and you borrow $2000 for one phase of your home renovation, $5000 for another phase, and pay back $3000, you can still borrow $6000 for yet another phase. A home equity line of credit is a great option if you can easily break up your home renovations into phases and would like to have some funds handy in case of incidental expenses. It also makes sense if you can only predict a certain amount of the cost, while other expenses become apparent once the renovations are underway.
HELOCs can also be combined with your mortgage if that is the right option for you. As always, do conduct your due diligence research and shop around to find the best line of credit deal for you. At Innovation our lines of credit only need minimal payments and offer lower interest rates than credit cards. Speaking to a financial expert or a mortgage advisor can also go a long way in choosing the right HELOC and mortgage combination.
Home Equity Loan:
A home equity loan is similar to a home equity line of credit in that you can get a loan against your house. The main difference between a home equity loan and a home equity line of credit is that you would get the entire loan amount in a lump sum and cannot keep borrowing as you would with a HELOC. Note that if you aren’t able to pay back your loan or keep up with your payments as specified in your contract, then you could risk losing your home as your house is shown as a guarantee that you will pay back your loan.
Cash-Out Refinance:
A cash-out refinance means you close your current mortgage and take out a second larger mortgage on your house. It is similar to refinancing your mortgage. The only difference is that you will get the remaining funds after your first mortgage is paid off in your bank account and can continue to pay your second, larger mortgage over time. Usually, cash-out refinancing comes with a caveat, that you can only refinance up to 80% of the value of your home.
For example, if you owe $100,000 on your home, and its total value is $200,000, then you can refinance up to 80% of $200,000 which is $160,000. Your remaining mortgage payment of $100,000 for the first mortgage will be paid off, and you will receive $60,000 that you can use as you wish for your home renovations.
Cash-out refinancing makes sense if you’re house has appreciated considerably since you first got it or you have already paid off a large chunk of your first mortgage, allowing you to use more funds towards renovating your home. Like all mortgages, you should shop around, speak to a mortgage advisor and get the right mortgage for you.
Unsecured Loan:
If you don’t want to risk putting up your home as collateral and your mortgage is already paid out, then you can consider taking an unsecured loan to fund your home renovations. Unsecured loans will usually come with higher interest rates since there is no collateral. It also helps if you have a great credit score so you can get the best deal on your unsecured loan. However, if you don’t mind paying more in interest, don’t want to risk property foreclosure, and need the funds urgently, then they may be the best option for you.
Credit Cards:
If your home renovation expenses aren’t a really big amount, and you need to make them urgently, then using your credit card could just be the best option for you. You could also earn rewards points you can redeem and enjoy later. However, do keep in mind that credit cards come with a very high interest rate, so you will have to bear that extra cost. A credit card is a revolving line of credit too, and if that is what you really need, then you may just be better off opting for a line of credit that offers a lower interest rate instead of paying with your existing credit card. Do make sure to check your options, because while credit cards seem like the easiest, and work great in times of emergencies, you may be able to get a cheaper alternative that does not burn a hole in your pocket. What’s more, if you default on your credit card payments, then your credit score or credit rating will take a hit.
So, there you have it. We’ve covered some of the best ways to finance your home renovations whether by cash or by loan. Still unsure of the right option for you?
Contact us today, and we’ll get you the right assistance you need to put an end to your home renovation financing worries.