Should I Borrow To Renovate? Home Improvement Loan or Home Equity Line of Credit?

In this video I talk about the question I get from clients… Should I borrow to renovate my home?

Hello i’m stephen cruise with my mortgage broker calm and paragon mortgages and today i want to talk about should i borrow to renovate i have clients asking all the time about different ways to finance renovations and and this question comes up quite a bit and so i thought we could review some of the renovation options and whether or not you should potentially do

That and borrow when you want to renovate so let me just change over and share my screen and we’ll go from there okay here we are so should i borrow to renovate how can i finance the renovation and pros and cons of financing home renovations and then we’ll talk a little bit about whether or not you should do some renovations or what you could at least think about

When you want to do some renovation so how can you finance a renovation there’s a number of different ways there there are savings if you had cash you could finance with cash you could take a personal loan or a personal line of credit could do a mortgage you could do a home equity line of credit or you could do a center second mortgage so each of those have some

Advantages and disadvantages so let’s look at those first so savings if you have enough money and the cash available then why not just use that money to do your renovation then you don’t have to incur any extra costs no no mortgage financing costs or any interest cost of video personal loan or whatever so that is certainly one of the ways most people who come to

Me don’t have the cash to do that but you might be able to do that if you if you do second option could be a personal loan a personal credit with a personal loan personal and credit the interest rates are a little bit higher than mortgage rates so you’re probably looking at the six to twelve percent interest rates you don’t want to finance it on a credit card and

I have had some clients have done that financed some renovations on credit cards and that’s just not a good idea the the loan is typically amortized over four to five years for lines of credit generally the lender is going to ask you to pay three or two percent of the outstanding balance which works out to be a three to four year term over time if you keep those

Payments consistent and so if we were to look at a $10,000 loan for a personal loan or a personal credit you’re looking at payments anywhere from two to three hundred dollars per month per 10,000 so if it’s a hundred thousand then it’s two thousand if it’s a hundred thousand dollar right oh i wouldn’t necessarily recommend a personal loan and you may not qualify

Lots of lenders won’t provide that size of personal loan for financing today typically they’d want a collateral like your house or something else so the next option would be a mortgage so if you’re in a first mortgage you if you had no mortgage in place you could just set up a mortgage if you had an existing mortgage in place then there could be a penalty and the

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Penalty will depend on the lender you have and how they calculate the penalties and so sometimes there’s a disadvantage of just doing a mortgage and so that’s why there are other options we’ll talk about some other options for mortgages coming up for renewal and you’re planning on doing doing renovations in the future you could refinance that when it comes up for

Renewal then there’s no penalty and then you get access to cash right now interest rates are you know sub 3% are really close to 3% so the interest rates are quite good payments can be amortized up to 30 years on a home mortgage when you refinance when you already own the home you can finance it up 30 years the monthly cost on 10,000 would be around 47 dollars a

Month to $42 a month if it’s over 35 years or sorry 30 35 30 years so you have 25 or 30 year amortizations you could certainly do it over a shorter period of time but for every $10,000 you’re gonna borrow on a mortgage it’s gonna cost you about forty seven dollars so that’s just i did that to keep compare apples to apples i’ll do that before all of the different

Types of financing so that you can see how they work home equity line accredits the next option so with the home equity line of credit you can you can leave the existing mortgage in place and set up a letter put it behind it so that there’s no penalties to pay it out and so it’s also advantageous for you because the the first mortgage again there’s no penalty

If you had no mortgage then you could just set up the line of credit the nice thing about the line of credit is flexible you can draw it as much or as little as you want interest rates typically set up to 80 percent i’m sorry setup at prime plus 1/2 now here you can go up to 80 percent of the homeless value if it’s in second position behind the first mortgage but

The maximum of hogan equity line of credit can go to is 65 percent of the value of your house if there’s no mortgage so i was thinking here in this case when i said 80 percent i’m referring to having a first mortgage in place and with that you can set up a second mortgage home equity line of credit up to 80 percent and on $10,000 the payments around $38 a month

Interest only so you can see that it’s not that much less than the the mortgage payment for $10,000 that we talked about on just the last slide so next option would be a second mortgage for a second mortgage you again don’t have to pay out the first mortgage so there’s advantage there that you you don’t have to pay any penalties there there are some disadvantages

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In that the interest rates could be higher so you’d be looking at interest rates around 6 to 16 percent depending on your credit and how close to 80 or above 80 percent of the value you want to go there are some additional setup costs typically with a second mortgage mostly its alternate lenders who offer these and the setup costs that there’s typically a lender

Fees and sometimes a broker for you to set this up if we look at $10,000 their payments around 60 to 130 dollars per month so the payment again is is quite low in relation to an unsecured loan but some of the costs are a little bit higher and so the pros and cons of renovating the one of the pros is that you are going to be more comfortable you can make your house

More comfortable more stylish more modern and you can potentially increase the value of your home the some of the cons is that you might get into some more debt so longer longer debt and paying off your mortgage longer you may not get defined not enough financing if you don’t have enough equity in your house you may not get as much money out to do the renovation

So you might not be able to do everything you want to do the other thing with renovations that i’ve had with clients had issues that clients have had is cost overruns sometimes you open up walls to big renovations and you find something in there that that needs to be repaired or replaced or fixed and it creates more costs than originally planned should you borrow

To renovate well it depends on your situation sometimes it’s a good idea and sometimes it’s not so you want to think about whether or not you’re gonna stay in your home for a long time if you’re going to do a large renovation you don’t necessarily increase the value of your home dollar for dollar for every dollar you spend on the renovation so if you’re going to

Stay there a long time you’re more likely to capture the cost back if you’re just going if you’re just planning on renovating so that you can flip the house and move on to something else then sometimes doing less expensive things can improve the value and help you sell your house so then then you can move into the right house for you so it’s important for you to

Look at your timeline and that that is a big factor sometimes it is better to renovate your neighborhood’s great your locations great your yard your yard is big or you’ve got trees some sometimes the the home or the location your ad is just fantastic and so staying in this location and renovating home is better than selling and going somewhere else for a different

A different price or or or whatever so sometimes it’s better sometimes it’s better to sell sometimes the place just needs so much work that that it’s better to sell and move to another house and i’ve had clients come to that decision – costs versus value i mentioned that earlier the cost of the improvement you have to evaluate that a bit against the value of your

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House on how long you’re gonna stay there so if you’re planning on staying there a long time again the costs you can do something and be comfortable and be happy with your house but if you’re not planning on staying there a long time and you’re going to do a huge renovation you want to make sure that you are wise and strategic with the renovations you’re doing

Considering the financing you may or may not get enough money so if you’re planning on borrowing – to renovate and you don’t have any cash saved you want to make sure you can borrow enough to do everything you want or you have to do it in stages so finding out exactly how much you can get before you renovate is also a very good idea so it gives you a bit of a

Budget and helps you with your timeline you won’t get this you won’t get disappointed if you if you know upfront how much you can get and then considering you to your your time and your family when you’re renovating your house it could take three months could take six weeks could take six months and there’s your time and and your family’s upheaval in the house

And and that can be difficult and so so you want to evaluate that and see if it’s worthwhile for you to do that or not i’ve have had clients who’ve done some big renovations on the house and they’ve actually moved out they’ve rented another place got the renovations done and come back which is really nice but again that’s a cost that you that would you would have

To incur as part of your your renovation costs and again the last question i think the most on one important one that we’ve talked about throughout here is how long do you plan to live in this house that really is the key sometimes if you’re just planning on moving soon maybe a new paint job and some carpets or something might make your house more comfortable for

You without having to do a major renovation that you won’t get back if you if you sell it later so if you enjoy the information that i provide on my channel please press the subscribe button below and and like then press the like button to subscribe you can click you can go to my website my mortgage broker comm slash youtube and that will take you to subscribe if

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Transcribed from video
Should I Borrow To Renovate? Home Improvement Loan or Home Equity Line of Credit? By My Mortgage Broker – Steven Crews