REFINANCE PLUS IMPROVEMENTS MORTGAGES
Leverage home equity for home improvements.
With interest rates on mortgages currently lower than other sources of credit, it makes more and more sense to use the equity built up in your home to fund improvements to it.
There are two basic situations you might find yourself in here, depending on the size of your existing mortgage relative to the value of your home.
If your mortgage balance is less than 80% of your property value, then you can do a simple refinance up to that 80% level. For example, if you have a house worth $400,000 and a mortgage balance of $300,000, you can refinance to take out an additional $20,000, giving you a new mortgage balance of $320,000 (80% of that $400,000 value). Lenders will typically ask what the purpose of the extra funds is, but no proof of the use of the funds is required.
If your mortgage balance is more than 80% of the home’s value, or if the amount of money you could get by borrowing up to 80% is insufficient for the renovations that you want to do, then you can use a refinance plus improvements mortgage. The guidelines for this product vary somewhat from lender to lender, but the limit of how much you can borrow is determined by the predicted improved value of the property rather than the existing value. Improved value is generally determined by adding the cost of the renovations to the existing value of the home. There are constraints, however, on the dollar value of these improvements. Again this will vary from lender to lender, but a good general rule is that they will allow up to 10% of the initial value of the home, or $40,000, which ever is less.
Let’s take that $400,000 home from before. If the owners want to renovate their basement in order to add a suite and they’ve figured out that the changes will cost them $35,000, would a refinance plus improvement mortgage work for their circumstances?
First we need to think about that 80% loan to value limit. The improved value of the property would be $435,000 ($400,000 plus the $35,000 renovations), 80% of which is $348,000. With their existing mortgage balance of $300,000, there is plenty of room to borrow the $35,000. That amount is also below the 10% or $40,000 guideline of the lender, so these homeowners could take advantage of a refinance plus improvement mortgage to renovate their basement.
With these kinds of mortgages, since the new value of the home is predicated on the owners completing the work they say they will complete, lenders will usually require estimates for that work before they will approve the mortgage. Some will release the funds before the work is done, however most will hold the money back until an inspection is done that shows that the work has been completed. If you’re considering a refinance plus improvements mortgage, it’s a good idea to talk with your broker to come up with a budget and a strategy. This kind of mortgage can be a little bit more work, but can both improve the value of your home and your enjoyment in it – and ultimately, you always want home ownership to be enjoyable.