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Proper planning is absolutely essential when you are thinking of redoing your home, says Rajiv Raj
There could be various reasons to take up a home renovation project. Remodelling your home can give your old home a fresh breath of air.
It will also increase the resale value of your home if you ever plan to sell it in future.
However, home remodelling project is a long term affair which requires you to put a lot of efforts and money to make it possible.
The remodelling project can be expensive and it is essential to find the most cost effective ways to finance the project. Here's how to go about it...
1. Start with a budget
Having a budget in your hand is crucial before you finalise the best way to finance your project.
For that, you will need to access your home and find out which part needs renovation. Once you have a ballpark figure, it is time to research various financing options available to you.
2. Home improvement loans
The simplest way to finance your renovation project is to take a home improvement loan. These loans can help you to upgrade and enhance your home. You can apply for home improvement loan either separately or jointly with your parents, spouse or any other close family members.
These loans are different from your home loans and as such you will have to go through the whole process from the beginning.
They will have separate interest rates, separate tenure and separate terms and conditions.
Your credit score and your existing loans will greatly affect your ability to get the loan.
3. Home equity loans
To avail a home equity loan you have to own a property for long enough time to build substantial amount of equity. The equity in a property depends on two factors.
First is the market value and second is the outstanding loan.
As the current market value of your home increases or the outstanding home loan reduces, there is an increase in your home equity.
You can take a loan against this equity. The home equity loans are very much like top up loans.
Suppose, five years back you took a home loan of Rs 20 lakh. The current market value of your home is Rs 35 lakh. The current outstanding amount on your home loan is 15 lakh.
This means that you have built equity of Rs 20 lakh on your home against which you can take a loan. However, you will not get the entire amount as home equity loan.
The bank only lends 60 per cent to 70 per cent of the value of property as home equity loan. The calculation goes as 60 or 70 per cent of current market value minus your outstanding loan.
In this case, at 70 per cent you can get a home equity loan of Rs 4.5 lakh. The advantage of the home equity loan is that it is easier to get and is available at a lower interest rate.
However, the interest rate may still be higher than a loan against gold or FDs. Thus, you should make your move after carefully weighing all the other options.
4. Home loan refinancing
Another option for those looking for financing their renovation project is to refinance their home loan. The concept behind home loan refinancing for cash is essentially the same as home loan equity, in terms that you are taking the cash out of the equity you have built in your house.
However, there are some basic differences between the two. The first difference is in the loan structure.
In case of your home equity loan, your actual home loan is intact.
In case of refinancing, you are actually replacing the existing home loan with a new home loan.
The interest rate of home equity loan is also often-times higher than the home loan refinancing.
There is also a huge difference in the fee structure in both the options with home equity loan being less expensive in the beginning.
Photograph: See-ming Lee/Wikimedia Commons
The author is Co-founder and Director Credit Vidya.
