People have a variety of reasons for choosing to renovate their homes, ranging from saving energy to making more room and even to simply breathe new life into their space. In any case, though, financing a home renovation is different than securing a loan for a new home, so understanding your options are important. Before beginning your renovation process, consider a few tips and select the best financing option for you and your home.

Make a Plan

If you have spent any time considering the renovation of your home, you likely understand you have two basic options initially: financing the renovation out of pocket or borrowing money. Before deciding between these two options, you should meet with a trusted financial adviser to come up with a plan. A financial adviser will help you determine your best option and help you select an appropriate lender. This individual can also help you determine your borrowing options and make suggestions as to how much you can comfortably borrow. Your financial adviser may even be able to pre-approve you for a certain loan amount. In any case, it is important to take this step so you can adequately plan your financial approach to a renovation.

Consider Your Financing Options

As you make your preliminary plan, it is important that you understand all of the financing options available to you. Be sure to consider all of these options thoroughly before selecting a financing plan.

Your personal funds: If you are making small changes to your home and not a complete renovation, you may consider funding the costs out of pocket. This option is especially viable if you plan to complete the projects yourself.

Credit card: Using your personal credit card is another option that is effective for funder smaller renovations. Again if you are completing small projects yourself, a credit card is a good option. However, be careful and avoid carrying the balance for an extended period of time as credit card interest rates can exceed 18% or more.

Personal line of credit: This option is similar to a credit card in that it allows you to track your expenses and view your balance each month; however, a personal line of credit typically carries a lower interest rate than your credit card. This form of credit is particularly good for renovations over extended periods as you can access the funds at any time and as you pay off your existing balance, you gain access to the remaining funds without reapplying.

Secured lines of credit or home equity loans: This type of credit functions in the same way as a regular line of credit or loan, except that it is secured by your home’s equity. This option is typically very cost-effective as interest rates are generally low on secured lines. However, the initial cost of establishing a secured line of credit can be costly. Typically, the process involves legal and appraisal fees, and the loan amount is generally limited to 80% of your home’s value.

Mortgage refinancing: Much like an initial mortgage, refinancing affords you the opportunity to spread your repayment over an extended period of time at mortgage interest rates. This option is appropriate for funding major renovations and generally provides you an interest rate that is much lower than a credit card or even personal loan rates. The only drawback is that you are only able to refinance for 80% of your home’s value minus any outstanding mortgage balance. Likewise, this option incurs initial setup fees including legal and appraisal fees.

Combining purchase and improvements: If you are purchasing a home to which you plan to make major renovations, it may be to your benefit to combine your mortgage as well as your renovation costs at the time of purchase. Typically, you can obtain financing for this combine amount up to 95% of the value after the renovations are made with only 5% of the entire loan amount paid as a down payment.

Other Necessary Considerations before Renovating

When planning a renovation, it is important to consider the potential for unforeseen costs. You should plan on allowing for a contingency fund out of your renovation financing budget. This contingency allows you to pay for additional costs along the way without having to renegotiate funding.

You may also qualify for renovation grants or rebates depending on the extent of your project. The Canada Mortgage and Housing Corporation provides an extensive list of available grants and rebates for energy-saving renovations.