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If you decide that your home renovations warrant borrowing money, here are some options to consider when it's time to pay the piper (and the electrician).
1. Tapping your home equity
The least expensive way to borrow is with a home equity line of credit. It's now routine for banks to offer these when you renew your mortgage, says Bettina Schnarr, a certified financial planner in South Surrey, B.C.
"Banks will often ask if you want to add a line of credit for another $50,000, even if you don't need it right now." If you've already got such an arrangement, that's likely to be the best way to finance a major reno.
2. Keeping it personal
The choice is less clear if you have to apply for a new home equity loan. "A lot of people don't understand that there are upfront costs," says Patricia Everingham, the Toronto-based director of RBC Personal Lending.
A home appraisal fee, legal fees and other costs can total up to $700, she says. A personal loan or line of credit doesn't require these expenditures, so while it will carry an interest rate at least two per cent higher, it may be a cheaper option if your reno will cost less than $15,000, and if you plan to pay it off in two to three years.
3. Loan or line of credit?
Will you need the money a little at a time or all at once? "You may be buying materials and paying contractors over several months," says Everingham, pointing out that a line of credit makes this easy: You can even write cheques on the account.
A loan might be more appropriate if your reno involves a lump sum, like the cost of a new pool. "If you are not disciplined -- and most people aren't when it comes to paying off lines of credit -- that's also a reason to consider a fixed loan," says Schnarr.
4. Paying with plastic
Credit cards are convenient for small DIY projects that require several trips to the home improvement store for paint, fixtures and tools.
Plus, you'll rack up reward points quickly. But use plastic only if you'll pay off your project in a month or two: At 19 per cent interest, you'll pay about $16 a month for every $1,000 on your balance.
5. Remortgaging the house
Schnarr recommends doing this only if you can answer yes to three questions.
- Will the renovations add higher value to the home than the costs?
- Do you need to renovate your home (as opposed to just wanting a change)?
- Will you be able to pay off the new mortgage within five years?
|This story was originally titled "Finance a Reno" in the November 2011 issue. |
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