Refinancing for a reno
Use your home equity for home improvements
Dreaming of a new kitchen? How about a rec room addition for your growing family? Are you thinking of turning part of your house into a rental suite? Does your home need some upgrades like new windows and doors – or a new roof? If you are putting it off because you think you can’t afford it, a home equity loan may be what you need to stop waiting and start building.
If you have lived in your home for a while, a home equity loan can be a great option for financing your home improvement projects. In many cases, they come with a lower interest rate than other loans – because equity is considered excellent collateral for borrowing.
So what exactly is home equity?
Equity is the portion of your home that you own free and clear. Basically, it is the value of your home minus what you owe. So, for example, if your home is worth $450,000, and you still owe $200,000 on your mortgage, you have $250,000 in equity available to borrow.
To determine the value of your home, find out what similar homes in your area have been selling for (but remember to compare apples to apples – a four-bedroom, two-storey will be worth more than a bungalow on the same street, and a place that has been renovated top to bottom will have a higher value than a fixer-upper). That should give you a rough idea. Your mortgage broker can set you up with a home valuer to determine the actual value before you sign on any dotted lines.
Up the resale value
Home improvements can significantly increase the resale value of your home. If moving is not in your plans, improving your enjoyment of your home is a worthy investment too. According to the Appraisal Institute of Canada’s 2004 Home Renovation Survey, you get the best ROI by upgrading the kitchen, fixing up bathrooms, and painting the interior and exterior. Other improvements that have great payback potential include a basement renovation, a rec room addition, replacing the heating system, building a deck, putting in hardwood flooring and building a garage.
A few renovations that do not pay back as well; landscaping, putting in a pool, building a fence, and installing a skylight are great for personal enjoyment, but they are not likely to increase resale value.
High-ratio home equity loans
What if you need more money for your home improvements than you can get from your equity? You may still have some options. Genworth Financial and CMHC – insurers who cover regular mortgages that have down payments lower than 25% – will insure an equity loan if the total of your current mortgage plus the new loan ends up being more than 80% of the current value of your home.
Qualifying for a high-ratio home equity loan may depend on the type of improvement. Pools and spas may not qualify, since they have very low returns, and can actually negatively affect the value of your home.
Home equity – it’s not just for renovations
If you need cash, home equity loans are an excellent source of funds for things other than improvements. You can use them to:
- • Start a new business or buy an existing one
• Increase your net worth by buying a second property
• Consolidate debt (simplify your payments)
• Finance a wedding a dream vacation, or a child’s education
Whatever your financial needs, if you have home equity, you have some great borrowing options.
