I am thinking about renovating my home and am looking into rolling the costs in to my mortgage. Is this a good or bad idea?
As with many financial questions this one has to go with several variables.
If you are looking at smaller projects that you are doing yourself and can take advantage of possibly using a Home Depot credit card with zero percent interest, knowing that you can pay it off in a year, then take a look at that option.
If you are looking at doing a major renovation, i.e. a brand new kitchen or addition to a home, and are using contractors then looking at using the mortgage as a tool could be an option. A HELOC (Home Equity line of Credit) is an option if your LTV (Loan to Value) of the house is greater than 65 per cent. In this case using the equity in your home is a viable option to help finance home improvements.
For example, if your mortgage is $150,000 and your home is worth $320,000, your LTV is 46.875 per cent. This means you would have $58,000 of room in equity to attach a HELOC to your property. It is generally at a floating rate of prime plus 0.50 per cent and you only pay interest on what you owe. Many institutions allow you to lock in a portion to the fixed rates at the time. Remember when setting up a HELOC, there are lawyers fees as well as discharge fees in case you do decide to sell your home.
The other option is refinancing your mortgage. With a refinance you can go up to 80 per cent LTV.Your existing mortgage lender may offer you a “blended rate”. This is essentially, a blend of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so make sure you compare the blended rate against the savings if you break your mortgage. Also, with this option there might be lawyer’s fees if they have to register your home at a higher amount.
If you would like me to run through any scenarios particular to your situation I would be more then happy to.