May, 2018 |

Many of us have started counting the weeks until summer is finally here. It is the time for homeowners to indulge themselves in the pleasure of home renovations. A Home Equity Line of Credit, or often known as HELOC is a loan where you use the equity in your home as security.

It is similar to taking a second mortgage, but the borrower doesn’t receive the total amount upfront. The lender lends you a certain amount that you use within a term, and spend as a line of credit. To many Canadians, it is the ideal financial tool for improvement projects of your home.

Below are some of the reasons why:

a) Ease of Access to Available credit

Depending on the equity you have in the property, you may be able to borrow a significant amount of money. In an ordinary home equity loan, you can get a lump sum. You then have to make monthly payments towards it, as you do for the mortgage.

You can borrow up to your limit or less than that. Monthly payments may vary depending on the money you owe.

b) Lower Interest Rates

The lender relies on your home as collateral. And so, it is willing to loan you the amount at a lower rate. It charges less than concerning interest, compared to a credit card. It is so because the lender faces lower risk as compared to an unsecured credit card.

Some lenders also offer introductory teaser rates that may apply for the first six months and thus make them, cheaper.

c) Debt Consolidation

A HELOC can be a great way for you to consolidate your debt. But you have to exercise discipline in making payments on your line of credit. You can use it to reduce the monthly outgoings that you have to pay on loans or credit card balances that charge higher rates.

d) Flexibility

It gives you the ability to borrow up to a certain amount, in a specified period. And you don’t have to use any of that money. Thus, it may serve as an emergency fund to cater for costly home repairs that are urgent or projects that run in stages.

First, review your financial situation before you choose to borrow against your home. It will help you avoid the pitfall of having to reload. Understand the terms of the loan and ensure that you will be comfortable repaying the amount before it is due.

Your home is an important investment. We all have different reasons as to why we want to renovate. If the family is growing, you want to make more room; it could be to improve the look of your home, or the need to conserve energy, among many other things.

Smart renovations will also improve the value and utility of the property. Now that you have determined the need to renovate, you have to consider your financing options. You will first have to determine the scope and scale of the project.

Don’t forget to consider your repayment plans. For Canadians, the following are the financing options for your home renovations:

1. Home Equity Line of Credit (HELOC)

It works in the same manner as a personal line of credit. It is more cost-effective as compared to using your credit card and drawing cash advances. You can borrow as much as your limit, and you will require mastering discipline to repay, and you pay as you wish.

2. Another Mortgage

This method provides you with upfront cash, and you will have a repayment plan that’s structured. It is a loan that you take in addition to the existing mortgage on your property. You will have to pay back the loan amount, on top of the payments required on the original mortgage.

3. Equity Take-Out

It could be an ideal option for a homeowner whose lease is due for renewal and has been putting off plans for renovations. If you have equity, you can access some of it by borrowing on the “as-if-improved” value of the home. You can also opt to replace the current mortgage with a new one that’s based on 80% of the appraised value of the house.

4. Financing Improvements Upon-Purchase

If you have found your dream home but still need to make a few renovations upon purchase, you can borrow more money as part of the mortgage financing for the purchase. It could be in undertaking repairs that add value to the property, e.g., getting new windows, roof, kitchen, etc.

Here, you add the estimated cost of the renovations to the mortgage. With a 5% down payment, you can get up to 95% of the value of the property after improvements, with a CMHC Mortgage Loan Insurance.

Before you break down your walls for renovations, it is advisable to get professional advice on your financing options. Reach out to Expert Financial Corp for your mortgage solutions.