The best ways to finance home improvements
We spend a great deal of time in our homes. They become a part of our history and family. Whether you’ve been living in your home for many years or not long, it may be time for a little extra TLC (tender loving care).
Home improvement loans are an option for many to pay for home renovations when the cash is just not readily available. There are also more frugal ways to pay for home renovations. We are breaking down answers to the following questions:
- How to finance a remodel without equity?
- How to pay for renovations on a new home?
- How to use home equity for renovations?
- How to finance home improvements on your mortgage?
Keep reading to find out how you can afford your dream home with renovations.
How to Use Home Equity for Renovations
Home equity loans aren’t a one size fits all arrangement and are tailored to your specific needs. The equity in your home is the amount of ownership you have in your home. That is, the appraised value of our home, minus the amount you still owe on your mortgage. For example, if your home is worth $350,000 and your current mortgage balance is $250,000, you have $100,000 of equity in your home.
Home Equity Loans
A home equity loan is a secured loan that lets you borrow against the equity in your home. Because it’s a secured loan, you can borrow a larger amount of money at a lower interest rate than you’d get with an unsecured loan.
A home equity loan is the best option for you if you have any of these situations…
- Large fixed cost purchase
- Want predictable monthly payments
- Need to access a larger amount of money.
Home equity loans usually are not for you if you only need a small amount of cash. While some lenders will extend loans for as little as $10,000 – most won’t give you one for less than $35,000.
Home Equity Line of Credit (HELOCs)
Home equity lines of credit (HELOCs) are a revolving source of credit, much like a credit card, secured against the value of your home equity.
Unlike the other lump sum options, with a HELOC, you can make withdrawals as needed during the draw period.
Best if you are…
- Looking for flexibility with regards to how and when you spend the money
- Want payments which are interest only
- Want flexible repayment options.
HELOCs tend to have few, if any, closing costs, and they usually have variable interest rates. You’re able to borrow against your credit line at any time, and untouched funds don’t charge interest. These credit lines can also serve as a nice emergency fund.
With cash-out refinancing, you replace your existing mortgage with a new one that’s higher than your loan balance – so you can take advantage of the equity you’ve built up on your home.
Best for you if you’re looking for…
- Lowest cost available
- Want a single mortgage payment
- Want to amortize your payments over a longer period of time.
With a cash–out refinance, the new mortgage loan is for more than what you owe on the existing mortgage. The difference between the entire amount of the new loan and what you owe on your current mortgage is paid to you in a lump sum.
At Fraction, we believe the best way to finance home improvements is with our appreciation mortgage. Fraction’s appreciation mortgage allows you to convert up to 45% of your home equity into tax–free cash. This is done without having to sell your home.
Unlike HELOCs and reverse mortgages, a Fraction appreciation mortgage allows you to check all of the boxes...
- Stay your home
- No monthly payments
- Qualify at any age
- No early buyout penalties
How to Finance A Remodel Without Equity
If using equity in your home is not a viable option – there are options available to finance a remodel without equity.
If you’re able to include energy consciousness while renovating your home, the government of Canada has home improvement incentives and rebates to promote the efficient use or conservation of energy, such as:
- Outfitting your home for solar
- Using energy efficient appliances
- Installing energy saving windows.
There are federal incentives, along with provincial and local incentives. Here are some examples:
- GST/HST new housing rebate incentivizes people with GST/HST rebates to purchase newer more energy efficient housing, including new construction, or substantial renovations.
- CMHC Green Home offers a partial refund on the cost of mortgage loan insurance. Buy, build, or renovate for energy efficiency and you may be eligible for a refund of up to 25% of your premium. If you purchase an existing home and make improvements toward energy efficiency, you may be eligible for a CMHC Green Home premium refund.
- CleanBC Better Homes New Construction Program provides rebates up to $15,000 for the construction of new, high-performance, electric homes.
- Home renovation tax credit for seniors and persons with disabilities BC seniors and persons with disabilities are given a hand with renovations to improve accessibility, function, and mobility at home.
- Refund on premiums
- Contributing to energy conservation
- Rebates available
- Availability for seniors to participate in the renovation
- Partial refund on mortgage insurance
- Limited to certain groups, and certain types of home improvements
- Energy saving appliances may be more costly than traditional
- Programs may only be available in certain demographic areas
Best for you if you…
- Qualify for government assistance plans
- Would like to install energy efficient appliances in your home
- Have access to contractors available to outfit your home for solar panels
Personal Loans and Home Renovation Loans
Some lenders market home improvement loans as separate products from their personal loan options.
Unlike Home Equity Loans and Home Equity Lines of Credit, you’ll pay a higher interest rate.
Best option for you if you…
- Desire alternatives to high cost options such as credit cards
- Expect an increase in value for the home
Fine for making minor updates to your home, such as upgrading a bathroom vanity or installing a new closet system. But, due to the potential to create a bad debt cycle, credit cards are not recommended for anything other than minor updates.
Some credit cards offer interest–free options on your balance for the first few months. If you’re able to pay off the balance within a few months, you may avoid paying interest. Some offer rewards – you could see a cash back option for home renovations.
Credit cards can be one of the most expensive ways to finance a major home renovation if you’re not equipped to quickly pay the balance. You could face exceptionally high interest rates if you’re unable to pay the balance back before the introductory period.
Best for you if you…
- Need to fix up a home before a sale
- Can't access other forms of credit.
Besides tapping into government funding, saving up for home renovations is going to be the cheapest option to pay for upgrades.
You may attempt to cut back on discretionary purchases to save money for a few months. By doing this, you’ll be able to pay for a home renovation in full without borrowing from a lender.
This can however delay your project for months which is not ideal for many.
As this has proven to be a difficult task for many, the chances are you wouldn’t be reading this article if this was an option.
Get a Fraction Appreciation Mortgage
With our Fraction appreciation mortgage, you can unlock up to $1.5M of your home equity while staying in the home you love. Plus, there are no monthly payments or unfair interest rates.
Without the added pressure of monthly payments, you don’t have to cut back on discretionary expenses and can live life everyday with greater financial flexibility. We also protect your home equity by automatically dropping your interest rate to the bare minimum possible. As your home appreciates, we’ll cap your interest rate so you hold on to more of your money – after some time, resulting in building wealth.
The process is simple – apply, approve, receive funds, and check in. Contact us today to get started with an estimate.