Why not improve the home that you have already made memories in, instead of starting over. The rising house prices increases the amount of equity you have in your existing home. This could allow you the opportunity to pull some of that equity to do some renovations to your existing home.
There are two mortgage options for this opportunity:
- Straight refinance - up to 80% of the value of your home
- Refinance plus improvements - allows you to borrow up to 80% of the improved value of your home, up to the lesser of 10% or $40,000 over the pre-reno value. (ie. $300,000 home could add up to $30,000 (10%) whereas a $600,000 home could add up to $40,000)
Let’s use $400,000 as the existing value. If the owners want to renovate their basement and they’ve figured out that the changes will cost them $35,000. The improved value of the property would be $435,000 ($400,000 plus the $35,000 renovations), 80% of which is $348,000. With an existing mortgage balance of $300,000, there is plenty of room to borrow the $35,000. That amount is also below the (lesser of) 10% or $40,000 guideline of the lender, so these homeowners could take advantage of a refinance plus improvement mortgage to renovate their basement. In this case a straight refinance would not give them enough money to do the renovation. They would only have about $20,000 ($400,000 at 80% = $320,000 less the existing mortgage of $300,000) to do the renovation.
With a refi plus mortgage, since the new value of the home is predicated on the owners completing the work they say they will complete, lenders will require estimates for that work before they will approve the mortgage. The lender will hold back the money until they receive copies of the paid invoice(s) and 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.