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Pay for home improvements with a cash out refinance

Get the money you need from your home's equity

A cash out refinance can be a great way to use your home's equity to pay for home improvements and repairs. This type of refinancing replaces your current mortgage with a new mortgage that has a larger loan amount, and you receive the difference in cash which you can use to pay for renovations.

Since the lender gives you a fixed sum of money at one time, a cash out refinance is a good choice when you want to make major improvements and know how much the work will cost. Consider these pros and cons before you make your decision.

Pros of cash out refinances for home improvements

  • You may pay a lower interest rate, compared to credit cards or personal loans.
  • A fixed interest rate means steady payments for easy budgeting.
  • Depending on the amount of equity you have in your home, you may be able to access more money than with a personal loan or credit card.
  • Improvements or renovations may increase your home's value.

Cons of cash out refinances

  • You will increase the amount of your mortgage.
  • You will likely pay more interest over the life of your new mortgage.
  • The interest rate on your new loan could be higher than your existing mortgage.
  • You will need to complete a new application, provide income and financial documents, and pay closing costs.

How much money can I get for home improvements?

It depends on how much equity is available in your home. To estimate your home's equity, determine the fair market value of your house and subtract what you owe on your mortgage. If your house is worth $300,000 and you own $200,000, you have $100,000 in equity.

You can, typically, tap into a percentage of your home's equity. How much you can borrow is affected by the maximum allowable loan-to-value ratio (or "LTV"), loan type, and other factors. Customers with a VA loan may be able to tap into 90% of their home equity. Here's an example of a customer with a maximum loan-to-value ratio at 80%.

Home value $300,000
Current mortgage balance $200,000*
Sample maximum LTV 0.8 or 80%
Maximum new balance mortgage $240,000 ($300,000 x 0.8)
Maximum cash available $40,000 ($240,000 - $200,000)

* If you have additional loans on your home, you'll need to subtract these from your home's value, too.

Remember: Some loans have a maximum LTV of less than 80%, and closing costs can reduce the amount of cash you get.

Make a plan and budget, first

Since cash out refinances require a new mortgage and provide a fixed amount of money, it is a good idea to plan your home improvements and get reliable cost estimates before you apply for the loan. Decide what you want to do and how much you can afford. Also, consider material costs and contractor fees. Research prices, look for professionals with good reputations, and get several bids in writing.

Other ways to pay for improvements

A cash out refinance is not the only way to get money from your home's equity. There are also home equity lines of credit (or HELOCs), that work like credit cards. HELOCs can be a good choice when you don't know how much money you will need or when you will need it. You can also consider a home equity loan (sometimes called a second mortgage). To learn more, read our article about these home equity loan choices.

Before using a personal loan or credit card to pay for improvements and renovations, remember: They usually charge higher interest rates and have terms that you'll want to understand before using this type of credit.

Last reviewed and updated February 2024 by Freedom Mortgage.

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