Financing A Big Home Renovation
Finding the money to finance a big home renovation project can be quite daunting if you do not have all the facts to help you make an informed decision. If you are lucky enough to have options available, you should look closely at the merits of each possibility as one may be more suitable than another. Each financing scenario will depend on your own financial situation and your personal preferences. Listed below are a few options to serve as a guide but you should seek professional financial advice before you make a final decision.
For some guidance on current borrowing costs in NZ, this site has a good summary.
Paying cash for a major renovation project should only be considered if you have a large amount of money readily available after you have taken care of all other financial considerations, For example, do you have a well funded retirement plan or are your credit cards paid off? It is certainly the easiest payment option as there are no appraisals to undergo, no forms to complete and no waiting period for approvals. However, the money spent on financing the project could be earning a higher rate of interest in an investment account and you could actually save money in the long run. In addition, loans might be tax-deductible, whereas home renovations paid for in cash will not have the same benefits. It is best to check the figures with your financial adviser who will be able to assist you in determining whether cash is a good option for you.
HOME IMPROVEMENT LOANS
You can approach your current mortgage lender to ask for a home improvement loan. They are generally willing to consider this if your credit rating is good and your existing mortgage payments are fully paid and up-to-date. This is often the easiest option since you already have credentials with your mortgage provider and a track record.
With this type of loan you have a shorter payback period than a mortgage often for ten years instead of the 30 you might have on your mortgage. The advantage of this is that the loan is cleared sooner and so you will be paying far less interest than if you took a second mortgage.
HOME EQUITY CREDIT
This line of credit is a finance option in the form of revolving credit with the value of your home taken as collateral. The line of credit is set at approximately 75% to 80% of the appraised value of the property after deduction of the value of any mortgage held on the property with a variable interest rate. The amount of credit available will also be determined by your credit history and your ability to repay. Once a line of credit has been set up the funds can be accessed whenever necessary. The drawback to this type of finance for new homeowners is that there may be very little actual equity that has been built up, the interest rates are higher and there is a cost involved in setting it up.
HOME EQUITY LOANS
A Home Equity Loan is also called a Second Mortgage and is basically a fixed term, loan based on the equity of your property. The loan is repaid in monthly installments similar to your primary mortgage. Lending institutions will offer loans of up to 80% of the appraised value of the property. Factors taken into consideration by the financial institution to determine the amount of the loan and the interest rate includes your credit history, the balance on your primary mortgage and your ability to pay the monthly installments.
CASH OUT REFINANCING
If you have owned your home for a long period of time and interest rates were high at the time you purchased it compared to current interest rates, this is a good option. After having your property appraised, a new loan process is undertaken which allows you to pay off your existing mortgage and the balance of the funds can be used to finance your project. This is not a good option if you are planning to move in less than a year or two.
When choosing a finance option for a major home renovation project, it is most important to determine what your budget limitations are and to stay within those limits.
CARRYING OUT A HOME RENOVATION
Once you have your finance in place you will need to find an Auckland home renovations company. There are lots of building firms but for a top quality building job you should consider looking at renovation specialists. Auckland has a few like Repair and Restore Ltd. For a home renovation job they are a good starting point. Give them a call.