At one point in your life, you plan to refurbish your house to increase the market value. A ton of home renovation ideas is out there on the internet, but you need to prepare a budget to proceed with the renovation part. Home improvement is not just about the remodelling of your kitchen and bathroom. It preferably includes the change of the entire look of your house.
When it comes to funding home improvement, you often look for refinancing your existing mortgage or taking out a home improvement loan. The former requires borrowing money on your current mortgage, and the latter is personal loans.
Of course, the former funding option will allow you to borrow a more considerable amount of money than personal loans, thereby the term of these loans will be longer. If you are not lucky enough to have set aside funds for the renovation of your house, you will have to borrow money.
Borrowing on your mortgage
Borrowing on your mortgage is nothing but remortgage. A remortgage is an ideal option if you are looking to a significant improvement. As long as it is revamping your house that includes a significant expenditure, you can opt for it. However, note that it is considered the best option when you get a new deal at lower interest rates.
Since here, the purpose is to access more funds than you will throw at your home renovation project, make sure that you have developed equity in your home. Sometimes refinancing does not allow you to access more funds as the market value may be less than or equal to the purchase price.
If you are on a mortgage for people with bad credit, you must be paying higher interest. Remortgaging can allow you to get a deal with lower interest rates. Further, you will get the advantage of credit score improvement due to timely repayments of your current mortgage.
If you are near to the end of your current mortgage deal, it might not be an ideal choice for remortgaging even if you have built good equity because the early repayment charge will cost you an arm and a leg.
Home equity loans
Home equity loans refer to the money you borrow against the equity of your house, thereby known as a second mortgage. Note that home equity loans are not remortgage. Remortgaging allows you to exit your current deal, but when you take out a home equity loan, you are liable to pay it off along with your primary mortgage.
For instance, if your property value has increased from £150,000 to £250,000, the difference of £100,000 is equity against which you can borrow money. These loans fit entirely your major home improvement project, for instance, kitchen remodelling, bathroom renovation and patio construction.
People generally seek home equity loans to personal loans because they carry lower interest rates as you put your house as collateral against the loan. Note that you will end up losing your house if you fail to repay your debt.
Home equity line of credit
It is also a second mortgage. It acts like a credit card that allows you to borrow a certain amount of money as per your need. Note that the home equity line of credit is suitable for funding home improvement projects because you often have no idea of how much amount you would exactly need.
It is an ideal option when you are looking to finance a large project, and you cannot access a new loan quickly. You will likely think credit cards are better than these loans, but where credit cards allow you to borrow about £15,000, a home equity line of credit will allow you to borrow about up to £150,000.
The length of these loans could be around up to 10 or 15 years. During this period, you keep paying off interest. However, you can put money toward the principle that goes back to your line amount.
Home improvement loans
Home improvement loans are unsecured loans, ideal for only small home refurbishment projects. The size of these loans can be between 7,500 and 15,000, and the repayment term can be between two and five years.
Monthly instalments will likely be more extensive. Further, the interest rate will be higher than home equity loans or home equity line of credit in that they are not secured.
If you are looking to renovate your house and you do not have enough funds in your savings, you will look for funding sources. Before you arrive at a decision, make sure that you have carefully analysed your needs. All loans like remortgages, home equity loans and home improvement loans work differently. Make sure that you have looked over your repaying capacity before making a decision.
Summary: There are various funding sources for home renovation and each works differently. This blog discusses all of them in detail.