Financing a major renovation

Financing our renovation may not be as easy as I first thought putting into limbo our plans to tear down and rebuild the addition this coming spring.

Typically, money for major renovations is obtained by using the equity in the house, that is,  the difference between the value of the house minus the balance remaining on the mortgage. 

Last week, I did some preliminary research,  calling our mortgage lender to inquire about the process of refinancing our mortgage.  Up to this time, I had assumed that there wouldn’t be any problem, because, since taking out our mortgage with this company, we have repaid much more than we plan to borrow since taking out our mortgage with this company, .  However, there is a fly in the ointment that I hadn’t considered.  The amount for which we qualify is based on an appraisal of the current value of the property.  

The gentleman on the phone seemed to believe that there wouldn’t be any problem.  Housing values in our area have rebounded since the crash of 2008-2009.  However, at this time, I have no idea what our house is worth in its current state.  The big question is whether the appraiser will actually examine the property.  It may not be a simple rubber stamp like it was before the housing crash.

On paper, the addition adds a lot of value to the house– home office/bedroom, family room with fireplace, large deck overlooking the back yard.  In reality, the addition takes away a lot of value from the house– it was built illegally and does not meet the building or electrical codes.  It encroaches on required setbacks.  It doesn’t match the architectural style of the original house.

Not only that, but we have also removed the front porch, the back deck is not built properly and the basement, which was finished when we moved in, has sat gutted for the last 8 or 9 years.  Our house may not be worth enough in its current state for us to finance the renovations through our mortgage as we planned.

That doesn’t necessarily mean that the dream is dead.  It just means that we have to get creative.

1.  Multiple sources of credit

At one time, all of our available credit, including credit cards and personal line of credit, added up to $100,000. Once we did that math, we drastically reduced or eliminated much of it, but no doubt we could probably get most of it back if we so choose.

Then, we could potentially finance the renovations using cash advances on the credit cards with the lowest rates.  We currently have a card with 5.99% APR and we continually receive offers for another card that we had previously that has an introductory rate of 0% for 12 months.  Those low-rate cards, however, charge a transaction fees of 2 or 3% of the cash advance, so that would tack on an extra $3,000 if we were able to finance $100,000.  That’s a lot of money for what amounts to a short term loan.

Once the renovations are done, we simply refinance our mortgage to pay off the higher interest debts.  This shouldn’t be a problem, since the appraisal for the refinance will be on the renovated house.

This is a high-risk strategy, however.  Remember 2008?    There is the possibility, however unlikely, that the market could crash again and leave us unable to refinance the mortgage.  We would still have our current mortgage, plus various credit card debts.  Juggling multiple debts can get pretty stressful.

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2.  Loans using other collateral

I have read online that it is possible to use retirement savings as loan collateral.  We have more than enough in our retirement savings to fully fund the renovation, so it might be possible to use our RRSPs to back the loan.  We would still have the ability to refinance the mortgage to consolidate the debts later.

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3.  Phased-in construction

Let’s say we only qualify for an additional $50,000 on our mortgage, falling short of the $100,000 that we need.  If we are strategic with that $50,000 we could conceivably increase the value of the house enough that we would be able to borrow the against the new appraised value in order to complete the rest of the project.  The downside of this strategy is that each refinance will cost us money for the legal fees and the appraisal.  The fees associated with phased-in construction amount to roughly the same as the cash advance fees on the credit cards.

4.  Invest sweat equity to reduce the total cost

How much can I save by doing some of the work myself?  Especially in the basement.

We would want the main floor to be professionally finished, but I am more than capable of finishing drywall, trim and flooring in the basement.  Will the savings be worth the time and effort?  Is that our only realistic option?

5.  Build now, upgrade later

Not all materials need to be high-end premium quality.  Basic fixtures and flooring materials can help keep costs down.  As long as the bones are good, the finishes can be upgraded in a few years.

6.  Postpone our plans

If we wait a little longer, we can build up more cash, pay down more of our mortgage, and therefore need to borrow less.  This option makes the most sense financially but it’s also the least desirable.  It would be nice to have the house finished before our daughter moves out.  We’ve already been waiting to do this for a decade.

Let’s take things one step at a time

We need to get some drawings to get a realistic picture of how much this project will likely cost.  Then we will know how much we need to finance and we can explore all of our options then.  I may be stressing out over nothing right now.  Our house could appraise for the amount we need in order to do a straight-forward mortgage refinance.

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