Financing Your Renovation

Once you have decided to renovate your home, you need to determine how you will pay for it, and how much you are willing and able to spend.

If you intend to borrow money for your renovation, it's a good idea to talk with your lender before you start making firm plans. Find out how much you can borrow and what options are available to you, and get pre-approval for your loan. Then you know how much you have to spend and are better prepared for detailed discussions with your renovator.

Here are some of the options for financing your renovation:

Cash - If you have cash in savings this will be the best way to finance your renovation. But be sure to consider the fact that, by paying in cash, you tie up money that could be earning interest in other investments. You need to look at the interest rate that you would be charged by financing the renovation and compare this to the interest you could earn by investing these funds.

Home equity line of credit - This is secured by the equity in your home and is among the most economical ways to fund a renovation if you have built up equity in your home. Your credit history and ability to pay may also be considered in determining the amount of credit available. A home equity line of credit usually carries a variable interest rate that is figured by adding a margin to the current Prime Rate. There may be other costs associated with setting up a line of credit but will vary from lender to lender.

Personal line of credit - This is one of the most popular financing options for smaller renovations and is also ideal for on-going or long-term renovations. With one application, you establish a revolving credit line that you can access at any time, up to your approved limit, and you only pay interest on the funds you use. As you pay off your balance, you can re-borrow the unused funds without reapplying. And you'll enjoy a rate that's lower than most personal loans and credit cards.

Personal loan - This lets you budget regular payments at a fixed or variable interest rate for a set period of time. Repayment periods typically vary, however once you pay off your loan, you no longer have access to the credit and will have to go through the approval process again if you need to borrow more funds.

Refinancing - If interest rates today are significantly less than when you first purchased your house, refinancing your mortgage may be a wise move. The refinancing alternative allows you to use the accumulated equity in your home to take out a new loan to pay off your existing mortgage and then use the remaining funds for your renovation. You need to factor in the length of time you plan to live in the house and the number of years left on your current mortgage before you decide to refinance.

Keeping to your budget - You've decided how much you can afford; now the real challenge is making sure you stick to this budget by:

  • Planning on spending only 80% of what you can afford. Put the additional 20% in reserve to cover changes, unforeseen problems, and miscellaneous charges.
  • Remembering that anything not included in the original contract will cost extra. It's very easy to start tacking on hundreds and even thousands of dollars in change orders that will break both your budget and your timeline.
  • Staying focused on the task at hand by sticking to the original renovation you have planned rather than deciding that now is the time to renovate the whole house.