How Can You Add The Cost Of Renovating Your Home To Your Mortgage
Options do exist that allow both homebuyers and homeowners to add the cost of a home renovation project to a mortgage. These include:
Homeowners who have equity that they can tap into can refinance their mortgage to add the cost of renovations, but this will often be at a higher rate and increased monthly payments.
Its important to understand, however, that while these options are out there, it doesnt necessarily mean that theyre the best way to finance a renovation.
Homeowners and homebuyers often jump straight into looking at options that allow these costs to be added onto a mortgage for the simple reason that they havent got cash available to finance the projects they want to get started on upfront, dont have the equity thats needed to take out a home equity loan or line of credit and dont want to take out a high-interest personal loan.
That said, you need to make sure that youre considering your options carefully and go down the route thats right for you. And this means understanding how the different options impact both your borrowing power and your monthly payments.
Can You Borrow Money To Make A Down Payment
Borrowing money to make a down payment is allowed, as long as you provide some of the down payment using the money you already have. The rules about where your down payment can come from are straightforward. Lenders require you to provide a minimum amount from your own resources: 5% of the purchase price up to $500,000, and 10% of the purchase price over $500,000.
If youâre wondering if you can use a home equity line of credit for a down payment, the answer is yes. Any money you borrow thatâs secured by asset, such as a loan secured by your home, RRSP, or life insurance policy, will work. However, HELOCâs are tricky for first-time home buyers, as you can only get one with a minimum amount of equity in a home â typically 20%.
Using other resources, like an unsecured line of credit, is only permitted by some lenders after the minimum has been met. That is to say, once youâve sourced the minimum down payment from savings, you may be allowed to borrow from other sources to increase your down payment. However, carrying debt could put your purchase price out of range if youâre near the top of how much you can afford to buy.
The good news is most Canadians use their personal savings as their primary source of down payment funds. But with mortgage rates in Canada at record-lows, itâs difficult to grow savings without taking on risk. So, is it a good idea to borrow for your down payment? Letâs look at the pros and cons.
Refinance Your Existing Home Loan
By refinancing your existing loan you could apply for extra funds to cover the renovation. You may need to have renovation plans ready to show your lender should they need to take into account the finished product when putting a value on the property.
Refinancing your home loan could come with other benefits too, such as potentially getting a better deal when it comes to rates and any other extra features your current loan may not currently give you.
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How Do I Get A Renovation Mortgage
A renovation loan has a few more steps than a conventional mortgage loan.
Steps for getting a renovation loan:
- The approval process can take longer for renovation mortgages than for conventional loans.
- It may be hard to find a mortgage lender that offers renovation mortgages
- Finding a good contractor who will work with the lender can also be difficult
- Renovation plans are set beforehand, so theres not a lot of room for flexibility
How Can I Fund Repairs Needed To Make A Home Livable If I Cant Get An Open
An open-end mortgage differs from most conventional mortgages in that they do not ordinarily provide funds in excess of those needed to purchase the home, even if the funds are used to make a home livable. If you cant get an open-end mortgage, there are other funding options available.
For instance, you might consider taking out a Fannie Mae HomeStyle Renovation Loan. With this loan, the money is distributed at closing to pay for the home. In order to access additional funds for home renovations, an approved contractor must submit their plans to access the draw.
The advantage of this is that it limits fraud, but it can be more tedious than taking out an open-end mortgage. Rocket Mortgage does not offer Fannie Mae HomeStyle Renovation Loans.
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How To Finance Your Home Renovation
Refinancing your home loan is a cost-effective way to finance a home renovation and increase the market value of your home. Here are two options to consider.
Renovating your much-loved family home can help realise your familys ever-expanding dreams, while also increasing the market value of your home in the long run. But renovations can be costly, and not everyone has immediate access to the extra funds needed to make the desired alterations.
Dip Into Your Savings
If you have a savings stash that you can dip into to finance your renovation, then you could save yourself on interest in the long run. However, there are a few things to consider.
Firstly, is your savings account offsetting your mortgage? If your savings are in an offset account, make sure you calculate the difference in mortgage repayments if you have less money offsetting your home loan.
Also, it can be handy to have an emergency fund for unexpected expenses, like additional renovation costs or a broken down car. Its good to have money set aside, or a credit card in your pocket just in case.
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Can You Add Renovation Costs To Your Mortgage
Editors Note: This blog post was originally published in April 2018 and has been revised to reflect industry updates.
As the real estate market continues to experience record-low mortgage and interest rates, higher-than-average prices, and bidding wars, many prospective buyers could become frustrated.
This is especially challenging with many sellers receiving higher-than-ask, multiple offers. WIth competition heating up even in moderately priced regions, another option is pursuing a home renovation or remodeling project.
While the most conventional route is a move-in ready or new construction home, other options include fixer-uppers or rehab properties. With both requiring more upgrades, repairs and maintenance, purchasing a home that needs work could be the ticket to your customized dream home.
Despite these advantages, some consumers are still hesitant due to uncertainty regarding project scope and affordability. Many often wonder: Is there a way to add renovation costs of my new home to a mortgage?
The short answer is: Yes.
While youll likely have additional questions, its best to contact a reputable lender, such as Contour Mortgage for guidance when choosing the right rehab loan for your project.
Lets review the benefits, requirements, and pros and cons of each rehab loan offered through Contour Mortgage.
How 203 Rehab Mortgage Works
The home that you buy and repair with a 203 Rehab Mortgage must be a minimum of a year old and the cost of rehabilitating it at least $5,000. After the seller is paid, the renovation money is deposited in an escrow account. The financial institution holding the money pays for the repairs as they occur. Polyana da Costa writes on the website Fox Business that FHA gives the buyer six months to complete the project and the right to request up to five payments for the contractor during that time. In addition, a construction consultant hired by the borrower must inspect the home before each payment is disbursed.
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Can You Add Renovation Costs To A Mortgage
Homeowners have many different options when renovation costs exceed their savings, but they dont need to put off crucial work when they cant afford it right away. Lines of credit and credit cards are common options, though the often exorbitant interest rates make these tough choices. If you already have a mortgage, the last thing you probably want is another thing to pay off.
To avoid adding new avenues of debt to your life, there are several options you have when looking to work renovations into the mortgage, both for soon-to-be and existing homeowners.
Is A Renovation Mortgage Necessary
Get two free tickets to the Homebuilding & Renovating Show
If the property you want to buy is run-down but still habitable, most lenders will offer 80-95% of its value as it stands. They may withhold some funds, known as a retention, pending the completion of essential repairs. The property will be surveyed and the surveyor will indicate any work necessary.
The property may have to be re-inspected before the balance of funds is released, and there will be a fee for this. Typical works include:
- damp-proofing
- repairs to central heating
Until the retention monies are released, repair works have to be funded by other means, such as credit cards or personal loans.
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Financing Your Home Renovations
Since your home is likely your most important asset, renovations can be a great way to increase your property value and also make daily living more comfortable. But before you start tearing down walls, consider your financing options for a remodeling project.
When thinking about funding sources, keep in mind the type of renovations you want to perform, the amount of money you need, and how long you anticipate paying off these costs.
First, estimate the cost of your renovation and determine whether you need all the money up front or in stages as the job progresses. This will help you decide which financial products are best suited to you.* For example, if the cost of the renovation is less than $5,000, you would probably pay with cash or a credit card, provided you pay your balance monthly.
Expenses between $10,000 and $20,000 may be suited for a line of credit such as the ScotiaLine® Personal Line of Credit with card access. This is a more cost-effective way to get the financing you need rather than drawing cash advances on your credit cards.
Got questions?
Can You Add Home Improvement Costs To My Mortgage
You can add home improvements to your fixed-rate mortgage. However, this is a common question, and the answer depends on the type of mortgageyou have. There are two basic types of mortgages: fixed-rate and variable-rate.
The interest rate on a fixed-rate mortgage does not change for the term of theloan, so adding home improvement costs to your mortgage will not increase yourmonthly payments.
However, if you have a variable-rate mortgage, adding home improvement costsmeans you will be responsible for paying an additional interest rate that reflectscurrent market rates when applying for a variable-rate mortgage.
In addition, in some cases, you may be required to pay points to get a variable-ratemortgage. One point is equal to 1% of the loan amount. Points areupfront fees that lenders charge borrowers when they take out loans.
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Think About Your Future Plans
If youre planning to move within a few years, freshening up a dated home or replacing an old, leaky roof makes sense to maximize your resale value. An expensive, large-scale renovation like a home addition, on the other hand, may not be worth the financial stress.
If youre leaning toward a home equity loan or home equity line of credit , keep in mind that youll have to pay off the debt when you sell if you havent already. Both loan types put a lien on your property, and you wont be able to give the buyer a clear title to your home unless its paid off. Your closing agent can help guide you through the process when its time to sell.
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Stop Wasting Money On Rent
While itâs not necessarily a bad financial decision to rent your home, your monthly rent cheque is guaranteed to be gone forever. By owning your own home, every dollar you pay in principal is a dollar you get to keep in the form of equity â assuming the value of your house doesnât fall. Of course, the interest charged on your mortgage can be considered equally as âwastedâ as rent payments. To avoid paying unnecessary interest, work out how much you can spend on a home before you shop around for a mortgage.
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Freddie Mac Renovation Mortgage
A Freddie Mac Renovation Mortgage is very similar to a Fannie Mae Homestyle Loan. Freddie Mac, which is also a government-backed enterprise, offers two versions of the loan: CHOICERenovation loan and CHOICEReno eXPress.
The CHOICERenovation loan is a relatively new option and, like Homestyle loans, it offers more flexibility than an FHA 203 loan and possibly lower interest rates, depending on your financial situation.
With a CHOICERenovation loan, the total cost of the financed renovations on purchase transactions cannot exceed 75% of either the purchase price of the property plus the estimated total renovation costs, or the completed value of the property, whichever is lesser. For refinance transactions, the limit is 75% of the completed value. All renovations must also be completed within 365 days of the note date, regardless if you are purchasing a new property or refinancing.
The CHOICEReno eXPress loan is meant for smaller-scale renovations where a smaller amount of money is needed, and the renovations will be done in a shorter period of time. Renovations must be completed within 180 days and the total cost of renovations cannot exceed 15% of the value for properties located in designated Duty to Serve high-needs areas, or 10% for properties not in Duty to Serve high-needs areas.
Both types of loans are available from Freddie Mac-approved lenders.
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Can I Add Renovation Costs To My Mortgage
Possibly. In Canada, there are at least a couple of different ways to add renovation costs to mortgages.
Sometimes lenders refinance a home to access equity needed to complete minor renovations. So, if your current mortgage balance is below 80% of the current market value of your home, and your family income supports a larger mortgage amount, you may qualify to refinance your mortgage with additional funds.
If youre buying a home that needs work, consider a purchase plus improvement mortgage. This allows you to complete the work required on the home with your own funds. Then once the renovations are complete, the lender releases funds to you and your mortgage amount increases.
For example, you may purchase a home with a mortgage of $600,000, and an improvement amount of $25,000. You use savings to complete the improvements/renovations, then your mortgage amount increases to $625,000 and you receive $25,000 cash to replenish your savings.
With Manulife Bank mortgages, you can get a purchase plus improvement loan of the lesser of these two options:
- 10% of the purchase price of the home, or
- The cost of renovations up to $40,000
Your mortgage will also need to be covered by an approved mortgage insurer.
The Lifelong Learning Plan
Tax-free withdrawals from RRSPs are also allowed to support what the government calls lifelong learning. Taking a page from the Home Buyers Plan, you can withdraw up to $10,000 per year from your RRSP, to a maximum of $20,000 over a four-year period, if you or your spouse is enrolled in a qualifying educational or training program .
Withdrawals are repayable to the RRSP over a period of 10 years in equal instalments otherwise there will be a taxable benefit. Repayments must normally commence in the year following the last year of full-time enrolment, or in the sixth year after the first withdrawal, if earlier.
If you do not have an RRSP, you cant set one up and then immediately make a withdrawal under the Lifelong Learning Plan the contribution must be in the RRSP for at least 90 days before you can deduct it from your income. If you already have an RRSP, you must also wait 90 days from the date of any contribution before you can get the deduction and withdraw the funds.
Is a Lifelong Learning Plan withdrawal a good idea? The answer is fairly similar to the Home Buyers Plan. Having to fund RRSP repayments will, no doubt, interfere with your ability to make regulartax-deductibleRRSP contributions. This problem could come at a time when youre in a higher tax bracket than when the RRSP withdrawal was made.
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