Deciding to purchase a home is all at once exciting and overwhelming. While your turnkey dream home might not be within your budget right now, the charming fixer-upper down the street is. Did you know it’s possible to leverage your mortgage to help you complete renovations before you move in? HomeStars connected with Alex Leduc, CEO & Principal Broker of Perch to find out more about the options new homeowners have when it comes to buying a home. Read on to learn how to use the budget you have for the home you want.
1. What is a “purchase plus improvements” mortgage and how does it benefit first-time homeowners?
A purchase plus improvements mortgage enables you to borrow additional funds to complete minor renovations on a newly purchased home. The core benefit is that you can finance that renovation (lesser of $40,000 or 10% of the original property value) instead of paying it all upfront out of pocket (as a first-time homeowner, you won’t have a ton of cash lying around after downpayment, closing costs, etc).
Here’s an example of someone who is thinking about buying a $400,000 townhome but would need to spend $40,000 for renovations and wants to put down a 20% downpayment.
Option 1: Standard Purchase
- Purchase Price = $400,000
- Down Payment = $80,000 (20% of $400,000)
- Renovations = $40,000
- Mortgage = $320,000
Cash Flow impact = $80,000 (DP) + $40,000 (renos) = $120,000 paid out
Option 2: Purchase Plus Improvements
- Considered Purchase Price = $440,000 ($400,000 + $40,000 renovations)
- Down Payment $88,000 (20% of $440,000)
- Renovations of $40,000
- Mortgage = $352,000
Upfront equity required = $80,000 (DP) + $40,000 (renos) – $32,000 (extra mortgage amount) = $88,000
The end result is that you can put in those required renovations early on as a new homeowner, rather than needing to put them off until you’ve saved up for the renos in full.
What options do new homeowners have when it comes to leveraging their mortgage to have renovations done?
Other than purchase plus improvements, not much else can be done upfront from a mortgage standpoint. However, to set yourself up for the future you should consider registering a Home Equity Line of Credit that you can draw on at a later date once you have some equity built up in the home. Note that this is only available to someone putting down at least 20% down payment.
Otherwise, they will need to revisit their mortgage at a later date to assess their refinance options. To find out more about what can be done once you’ve had a mortgage for longer, check out this article.
Where can first time homeowners go to find out more about their options?
Your mortgage broker should always be your first point of contact. At Mortgauge, we have the most comprehensive mortgage offers tool that helps you compare over 1,000 mortgage offers from over 20 lenders in under 10 seconds. We calculate the total estimated borrowing cost under each option so that you can compare across rate types (fixed/variable), terms (1-10 years), down payment amounts and conditions (prepayments, penalties, HELOC, etc). Once you’re ready to get pre-approved you are assigned a dedicated mortgage broker to work with you throughout the process.
What’s one piece of advice that can help a first-time homeowner get the most out of their mortgage?
Aim to get a great rate, but be sure to factor in all the conditions. Assuming a mortgage of $400,000, the value of 0.05% on your mortgage rate is about $800. The scenario I see often is that someone will take a rate that is not materially lower (0.05-0.10% less), but it comes with damaging penalty terms if they break their mortgage early. A lot of people end up breaking their mortgage earlier than 5 years for unforeseen circumstances and they end up having to pay 1.5-2x more in penalties to break, which could be over $9,000 for that $400,000 mortgage based on current rates.
Whether you need a little bit of work or a major renovation done to your new home, the good news is that it’s more attainable than you once thought. To help you get the most out of your home and make your mortgage work for you, be sure to check out Perch. They can help connect you with the right mortgage just like HomeStars can connect you with the right pro.