Home renovations are often necessary, but most homeowners are unsure whether they should refinance a mortgage in Canada before or after renovations. When is it safe to refinance a mortgage loan, and what are its benefits? Is this a good way of financing home renovations? Read on to find out.
Should you refinance a mortgage in Canada to finance major renovations?
Sometimes, it’s challenging to raise enough money to finance home renovation projects, which is why most property owners put such projects on hold. Suppose you consider refinancing your mortgage to pay for house renovations. In this case, it is recommended to reduce your outstanding mortgage balance, credit card debt, and any other high-interest debt.
Also, you should pay your bills on time as this will increase your credit score. Having a low amount of outstanding debts when applying for a mortgage refinance can help you get the best current mortgage rates. That means you will be making small, regular mortgage payments throughout your mortgage term instead of exhausting your savings to finance a home renovation project. This is one benefit of refinancing a mortgage for a home improvement project.
However, this doesn’t mean you can refinance a mortgage in Canada to finance just any home renovation. To determine if this is the right approach, you need to determine whether the renovations are worth it. Also, it’s important to evaluate your current mortgage term, the number of regular mortgage payments you make, loan terms from your current lender, and your financial situation.
Next, create a list of the aspects you like and dislike about your house. Rethink your lifestyle and how each room is currently being used and whether you wish to improve it. Note that refinancing your mortgage may offer you additional money to fund your renovation project without taking personal loans or compromising your financial goals. Remember, the planned home improvements must justify a mortgage refinance.
If the expected home improvements are small, you may want to explore other ways to finance your project or choose to do it yourself. DIY can save you money, but you must consider the complexity of the project, the tools you need to complete it, and the skills you need to complete the project. Alternatively, you can hire a contractor.
Should you refinance before or after home renovations?
Suppose the right circumstances exist, refinancing your mortgage after a major renovation can be quite beneficial financially. Once your home undergoes significant renovations, its overall value will increase significantly. Refinancing your mortgage after a major renovation sounds profitable, but you must consult with a mortgage professional to determine if this is a good idea. Here are important considerations if you want to refinance a mortgage in Canada before or after renovations.
Cash-out refinancing
Generally, a cash-out mortgage refinancing occurs when you decide to refinance your fixed-rate mortgage for a higher amount than the amount owed in your home but less than the home’s total value. This option can give you extra cash from your equity and still access lower mortgage rates on your ‘new’ mortgage contract.
The difference between your old loan value and the new mortgage amount will be paid to you in cash. Instead of opting for lines of credit to finance your home renovations, you can use this cash to finance your project. Note that it’s in your best interest to consult with an experienced mortgage professional to determine whether cash-out refinancing is a good option for you.
To refinance a mortgage in Canada and cash out in the process, there are important requirements you must keep in mind. For example, you must have a good credit score (620 or more) to be considered for these loans. When you submit a loan application for review (whether an online application or a paper one), the lender will evaluate various factors to determine if you are eligible for the amount you are borrowing. These factors include proof of income, your ability to make a monthly payment, your original mortgage agreement, and your debt obligations.
Having a specified amount of equity in your house may also be a requirement.
Refinancing to eliminate private mortgage insurance
In addition to raising funds for renovations such as bathroom renovations, it’s possible to refinance a mortgage in Canada to eliminate the need for private mortgage insurance. Coupled with the lower interest rate for the new mortgage, eliminating the private mortgage insurance means you will be making lower monthly payments. Remember, private mortgage insurance is often required for borrowers unable to submit the required down payment. This often raises the overall mortgage borrowing costs.
Final thoughts
It’s common for mortgage-related decisions to be influenced by different factors. If you plan to refinance a mortgage in Canada before or after renovations, consult with an experienced realtor or mortgage broker. Making realistic calculations will help you make more informed choices and avoid various pitfalls associated with mortgage refinancing.
