Why refinance to get money for home improvements?
A cash out refinance loan can be a great way to pay for home repairs. A refinance may reduce your interest rate, but also allows you to replace your mortgage with a new loan (and potentially better terms) and use your home's equity to finance a home improvement project. Before you decide to refinance for home improvements, you should understand the pros and cons and if it makes sense for your budget and needs.
Pros of a cash out refinance for home improvements, repairs and renovations
- Fixed interest rate
- One monthly payment, since the cash out you take is rolled into your existing mortgage
- The ability to increase your home's value if you use the money for projects that will help build up the resale value
- Potential for a lower interest rate through the refinance
Considerations of a cash out refinance for home improvements, repairs and renovations
- You will extend the term of your loan
- Could pay more in interest throughout the life of the loan if the term of your new loan term is longer
- You will need to go through the application and closing process
- There could be a chance of you owing more than your home is worth if home values dip down
Refinance vs. home improvement loan for home renovations
A cash-out refinance is one way to fund a home improvement, but there are home improvement loans available as well. When looking at a home improvement loan vs. a cash-out refinance, there are a few considerations to determine the best option for your financial needs. A cash-out refinance for home improvement allows you to take money out of your home equity to pay for the work, so you continue to have only one mortgage payment, but with a new interest rate, term and monthly payment. A home improvement loan is a second loan that will have a different term and interest rate than your primary mortgage. Both use your home equity to determine how much money you have available to take out to fund a home repair.
Generally, interest rates can be lower with a cash out refinance than a home improvement loan, but the loan amount is greater. If you can lower your interest rate on your existing mortgage, then a cash out refinance may be the better choice. If interest rates are higher, you may want to look into a home improvement loan. Also, take into account how much equity you have and the market conditions.
Refinance vs. HELOC for home renovations
Besides a cash out refinance for home improvement, there is also a Home Equity Line of Credit (HELOC), which is another option to pay for a home improvement project. This is different than a home improvement loan in that a HELOC is a line of credit that a borrower can draw from using their home as collateral. This is similar to a credit card as it's a revolving credit line you can access when you need to. You get approved for a certain amount of credit and only take what you need and have a few years to draw funds. One major difference of a HELOC from a cash out refinance for home improvement is that the interest rate is adjustable, so your interest rate could increase. A HELOC is a good option if you will need home improvements and access to cash over a longer period of time and don't need an immediate lump sum payment. However, a cash-out refinance for home repairs will have a fixed rate and it will likely be lower than a HELOC.
Should you refinance for home improvements?
There are a number of considerations you want to take into account to help determine whether a cash out refinance for a home renovation is right for you including the market conditions, interest rates, your credit score and fees associated. Check out home prices in your neighborhood. You don't want to improve your home with projects that won't increase the overall value of your home. If interest rates are higher, you run the risk of paying more in interest over the life of the loan, so shop around for the best rate. If your credit score is on the lower end, it may be challenging to get a home improvement loan or interest rate that works for you. If that is the case, you may want to wait until you can build up your credit score. Finally, note the closing costs and fees. While these can be rolled into the loan, you may not want to add too much in extra costs that could stretch your budget.
A cash out refinance can be a great option to fund a home improvement if you have the equity. Plus, if you refinance, you may be able to increase your home's value with the renovation, which can help build your home equity back up quickly.
How to use a cash out refinance for home improvements
A cash out refinance allows you to refinance your home for more than you owe and take the difference in cash to use for renovations or home improvements, although not all investors allow you to take the full amount. For example, if you have $100,000 left on your mortgage and your home is worth $200,000 you may be able to take out $60,000 to use for home improvements and maintain a sufficient amount of equity in the home.
Whether it's a remodel or home maintenance, a home improvement project can be an exciting time to make necessary fixes, improve your living space and increase your home's value. If you're ready to take the plunge and make improvements to your home, a cash out refinance can help you get access to the equity in your home to help pay for it. Find out how a cash out refinance can be a good option to help you tackle these projects or speak with a loan advisor today.