In ten years from now, you’ll finally have enough money to get an indoor pool.
Or you might prefer enriching your house with a massive home library or an immersive theater in the basement.
But ten years from now, will you have the same energy to live your dreams? No one can say.
This is why we’ve brought you five smart ways to finance your dream renovations right now. Here’s to living in the present!
1. Make The Most Of Your Home Equity
As a homeowner, home equity is a big asset that can help you finance your dream renovations.
By definition, home equity is the worth of the property that you actually own. It is the current market value of your property minus any loans or mortgages against it.
For example, if you own a house worth $500,000 and you’ve $200,000 left to pay, your home equity is $300,000.
And you can use this amount to apply for a:
- Home equity loan
- Home equity line of credit (HELOC)
Both of these are types of loans that use your home as collateral.
You receive a lump sum amount of money when you apply for a home equity loan, and you can use it to finance all your dream house renovations right now.
Note that home equity loans are much safer than HELOCs because they come with fixed payments as well as fixed interest rates.
On the other hand, HELOCs have variable interest rates, and therefore variable payable amounts.
In both cases, if you fail to pay back your loan, your home will be seized. So, do all necessary math before you sign up for this.
On the upside, utilizing home equity is a good idea because you can get much bigger loans compared to personal or credit loans.
With larger amounts, you can finance bigger home remodeling projects.
2. Consider Home Loan Redraw
Home loan redraw refers to redrawing the extra payments you’ve made for your home loan. To understand this better, imagine that you have a house worth $500,000.
Your minimum monthly repayment (or dues) is about $2000. If you decided to save an additional $200 each month and added these to your monthly repayments, you made extra payments.
If you now want to redo your kitchen, build a patio, or make multiple minor upgrades to increase the value of your home, you can request a redraw from your lender.
Not all lenders allow redrawing, so it’s best to discuss this with your lender before you start making extra payments.
For more information, check out Joust’s guide on what a redraw facility is.
3. Refinance Mortgage
Mortgage refinancing means replacing your current loan with a better deal.
Say you purchased a property worth $300,000 about three years ago and since then, the interest rates have fallen.
Mortgage refinancing allows you to look for a lender that offers you a lower interest rate compared to your current one. You can ask the second lender to pay off your loan balance with
the first lender. And you can then make monthly mortgage payments to the second lender at a reduced interest rate.
The overall amount due to the second lender would be lesser than the amount due to the first lender.
This means you’ll be saving money that can be used to finance home renovations.
If you’re wondering what less means here, visualize this as making the same monthly payments for a shorter period.
With that said, refinancing usually saves money but it’s not always true. We recommend checking out the pros and cons of refinancing (see more here), your mortgage before making a decision.
4. Consider Cash-Out Refinance
Alternatively, you can opt for cash-out refinance, where you get an amount that is equivalent to a certain percentage of the balance mortgage.
For example, let’s suppose you owe $60,000 out of $100,000 and borrow an additional $20,000 from a bank or a lender.
Now the total amount you’ll have to pay back is $80,000. You can pay it back at the same interest rate but over a longer period.
5. Apply For A Personal Loan
Personal loans are a smart way to finance your dream renovations. They are flexible in terms of collateral, so you’re relatively stress-free in that regard.
However, the amount you can borrow is somewhat limited.
The two common types of personal loan are:
- Secured personal loans
- Unsecured personal loans
Secured personal loans involve collateral. Depending on the lender and your mutual agreement, you can secure the borrowed money with your car or a cash asset such as your savings accounts.
Unsecured personal loans, on the other hand, require no collateral.
Independent lenders, banks, credit unions, and online lenders offer both types. However, the interest rate is much higher for unsecured loans compared to secured personal loans.
Also, personal loan amounts range from $600 – $100,000 on average. Experts recommend opting for a personal loan if the home renovations you’re planning cost $5000 – $50000.
For example, if you want a backyard pond in your house that costs about $16000 on average, a personal loan is the way to go.