It’s fairly easy to qualify for refinancing with your mortgage lender, our experts advise, but you should try to do it when your mortgage is up for renewal. Refinancing in the middle of your mortgage term may result in substantial fees. If the new rate is significantly lower, you could come out ahead, despite the fees; but you should ask your lender to crunch the numbers before you decide.
Refinancing a mortgage is a great option for those with a tendency to spend, as there’s less need for discipline, Phil Davie says. “You get a lump sum [loan, to cover the cost of your renovation] and the repayment is fixed. You can’t really abuse that money and you can’t get extra.”
If you add to your mortgage principal, you will owe more and, subsequently, you could have a higher monthly payment. However, if you add to the loan while locking into a lower rate, you may actually end up with a lower monthly payment (yes, even if you’ve borrowed more money). For example, if you originally owed $450,000 on your mortgage at 4% interest with an amortization of 25 years, your monthly payment would have been $2,375. If you added a $100,000 loan at the time of your mortgage renewal and locked into a lower rate of 1.8%, you’d owe $100,000 more but have a monthly payment of $2,278—slightly lower than your original monthly mortgage payment.
Unsecured personal loan or line of credit
You can apply for an unsecured personal loan or personal line of credit through most financial institutions, including banks and credit unions, as well as more expensive subprime lenders. A personal loan is a lump sum that you’ll repay with interest on a set schedule. A personal line of credit operates like a HELOC, with a limit you will continually regain as you repay the funds borrowed, but at a higher interest rate because it’s not secured to your home. The interest rates on personal loans and personal lines of credit are typically similar.
While this type of credit may come in handy in an emergency, Phil and Josh agree that it isn’t ideal for planned renovation expenses. Not only do these options come with much higher interest rates than secured forms of credit, you will likely have access to less money, which limits what you can do.
However, if you find yourself in a bind, an unsecured personal loan or line of credit with a reputable financial institution can be helpful. “If you can pay it off quickly, it’s better than using a credit card. But it’s not inexpensive or ideal for the average person.” While the interest rate on a HELOC may be the lender’s prime rate + 1%, interest on a personal loan might be anywhere from 6% to 16% or more, depending on the lender and terms, as well as your personal credit rating and existing debt load. The interest rate on a standard credit card will likely be 19% or higher.
The bottom line? In an emergency, a personal loan can be a lifesaver, but it isn’t ideal for most homeowners and should not be used for discretionary spending.
Borrowing money from a family member
A parent or other family member may offer to lend you the funds for your home renovation—and, while this may be tempting, advisors Phil and Josh typically advise against this option. “Technically, from CRA’s standpoint, the lender is supposed to charge interest based on a formula, but that rarely happens,” Phil says.