Line of credit for home renovations

[direct-x]

Looking at two options to finance some home renovations that we will be doing in the near future.

We just bought a house, and have no equity built up in it. We need to do about 20-25K in renovations and are considering two options.

1. Add the 20-25K on the mortgage, pay it off over time

2. Get a line of credit for the amount, pay back monthly installments.

I know option 1 is pretty crazy considering we will probably end up paying double once you think of all the interest and everything.

My questions are the following (assuming scenario 2 is chosen)

How do repayment terms work? ( Interest only, monthly minimum, etc)
What is the best interest rate that can be obtained for this type of financing?

Problem with adding the amount to the mortgage is that the bank needs to see invoices, estimates, and will only pay for work deemed to increase the value of the home, not things such as paint, window coverings, sanding and varnishing, etc.

[Drthorne]

if the bank approves you for a $25k line of credit and you use it all, you'd have to pay a minimum of $800/ month (get's less as the amount owed decreases). the interest on my loc now is 8% and it changes every couple of months with the prime rate change

[lint]

if the bank approves you for a $25k line of credit and you use it all, you'd have to pay a minimum of $800/ month (get's less as the amount owed decreases). the interest on my loc now is 8% and it changes every couple of months with the prime rate change


8% of $25000 = $2000
$2000 / 12 months = $167

Where do you get $800/month?

[chris647]

8% of $25000 = $2000
$2000 / 12 months = $167

Where do you get $800/month?


You are required to pay a minimum payment on the amount owing each month. For example, ING requires you pay back 2% owing each month. You can't only pay back the interest on your LoC you have to pay back principal as well.

In this case it would be $500/mth but different banks require different minimum payments.

[mjohare]

How much will a bank give you on a line of credit if you have zero equity in your home? What if you have made a 25K downpayment? Will they only give you a line of credit for 25K or will they give you more?

[Crowbarfoot]

Yea, most banks require 3% of whatever you owe repayment. Just like most credit cards.

If you don't have any equity in your property you wouldn't be able to add it to your MTG. You can only go up to 90-95% of the house value with a refinance.

You could get the line of credit, do all the renos and maybe with the increase value of your home either do a refinance or get a home equity line for more flexible repayment. ( usually interest only )

~C

[lint]

right. Was thinking about my heloc payments, not a regular loc

[BatKid]

If it were me, I would add to my mortgage instead of taking out a LOC. Since a mortgage will give you the lowest interest rate possible.

If you don't want that 20-25k to amortize over the term of your mortgage, then take advantage of the pre-payment options to pay down your mortgage faster.

Just my 2 cents.

[CSK'sMom]

With no equity in the house, quite frankly I can't see you being approved for either of these options realistically. Do the realistic thing and do the renovations over time, as you can afford to pay cash for them. Let's face it, refinishing floors is not a do or die situation...

[gman]

Looking at two options to finance some home renovations that we will be doing in the near future.

We just bought a house, and have no equity built up in it. We need to do about 20-25K in renovations and are considering two options.

1. Add the 20-25K on the mortgage, pay it off over time

2. Get a line of credit for the amount, pay back monthly installments.

I know option 1 is pretty crazy considering we will probably end up paying double once you think of all the interest and everything.

My questions are the following (assuming scenario 2 is chosen)

How do repayment terms work? ( Interest only, monthly minimum, etc)
What is the best interest rate that can be obtained for this type of financing?

Problem with adding the amount to the mortgage is that the bank needs to see invoices, estimates, and will only pay for work deemed to increase the value of the home, not things such as paint, window coverings, sanding and varnishing, etc.

If you really really have to renovate. Choose option 1. That will be cheaper because you can pay some lump sum every year. Mortgage has better interest rate than LOC. If you can afford to pay extra money every month to your LOC, you can put that extra payment to your mortgage.

Of course, if your bank does not allow option 1, it is moot.