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Tackling home improvement projects can make your home more comfortable and potentially boost its value. But one thing you’ll have to decide is how you’ll cover the costs.
Paying for home renovations may mean spending a little money or a lot, depending on the project you’re taking on. It helps to know what options you have for managing expenses.
6 ways to pay for home renovations
How you approach paying for home renovations can depend on your needs and financial situation. With that in mind, here are six possibilities you might use to fund home improvements.
1. Personal savings
If you have cash tucked away in a savings account, you might tap it first to pay for some or all your renovation expenses. Assuming your savings cover the entire cost, you won’t need to borrow any money to see your reno project through to completion.
Of course, draining your savings can be problematic if an emergency comes along. If you’ve depleted your savings, you could have to borrow money to pay unexpected expenses.
2. Home Equity Line of Credit (HELOC)
A home equity line of credit is a revolving credit line secured by your equity. Equity is the difference between what you owe on your home and its worth.
HELOCs usually have a draw period, where you can access your credit line, followed by a repayment period. You only pay interest on the amount of your credit line you use. HELOCs typically have variable interest rates, which means the rate—and your monthly payment—can fluctuate over time.
3. Home equity loan
A home equity loan is similar to a HELOC since you borrow against your equity. Instead of getting a revolving credit line, you’re getting a lump sum of money that you could use to pay for home improvements.
Home equity loans can have fixed or variable rates. The advantage of a fixed rate is that there are no surprises when it comes to payments, making it easier to budget. Unlike a HELOC, however, you’ll pay interest on the entire loan amount vs. just the part of your credit line that you use.
4. Cash-out refinancing
Cash-out refinancing allows you to replace your mortgage with a new home loan. At closing, you’d withdraw your equity as a lump sum in cash. You’d then make payments to the new mortgage balance, including the cash you took out.
A cash-out refi might appeal to you if you’d like to get money to pay for home renovations and change the terms of your mortgage at the same time. Cash-out refinance loans may have fixed or variable interest rates.
5. Government assistance programs
The Canadian government sponsors several programs to help ease home improvement costs. For example, the Canada Greener Homes Initiative offers grant funding and loans to homeowners planning energy-efficient upgrades.
Assistance may also be available at the provincial level, though you may need to meet special requirements to apply. In British Columbia, for example, some programs fund seniors who need help adapting their homes to make them suitable for independent living or want to make energy-efficient improvements.
6. Personal loans and lines of credit
One last option for paying for home renovations is taking out a personal loan or line of credit. Unlike a home equity loan or HELOC, personal loans are usually unsecured, so there are no collateral requirements to meet. And interest rates are typically fixed.
You might consider a personal loan or line of credit if you don’t qualify for a home equity loan or HELOC, or you’d rather not borrow against your equity. Remember that you’ll need a good credit score to get the lowest interest rates, and borrowing limits might be lower than home equity financing options.
Not sure how much equity you have? You can use an online calculator to estimate what you might be able to borrow. From there, you can take the next step and compare home equity loan rates.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.