Home improvements are a necessary part of homeownership, but finding the funds to cover them can be as difficult as the projects themselves. If you have ever renovated your kitchen or upgraded your bathroom, then you also know how expensive the whole process can be. While home renovations can help you turn your house into your dream home, it can be difficult to come up with the money needed to fund these projects. Refinancing your mortgage may help you obtain the funds you need to complete your list of to-do home projects.
What Is a Refinance?
A refinance revises your current mortgage, replacing your loan with a new loan – with an updated interest rate. Depending on current interest rates, refinancing could lead to lower monthly payments. A cash-out refinance is a popular option for home renovations because it allows you to turn your home’s equity into a large, lump-sum payment, re-distributing the amount into your monthly payments. Refinancing for home renovations is a good idea if:
- You need to make improvements or repairs, including an electrical or plumbing issue.
- You have a significant amount of equity in your home.
- You plan on staying in your home for at least another five years.
- Current interest rates are lower than yours.
Whether you have renovations that you need to complete or you want to increase the value of your home, you will need to figure out how to secure the funds. Choosing the right method depends on the current interest rate, credit score, and the type and cost of the project that you want to complete.
Should You Refinance Your Mortgage for Remodeling?
It is important to be aware of the pros and cons of refinancing for home renovations. Here are a few of the biggest advantages:
- Lower interest rates: A home refinance can offer a lower interest rate compared to other types of loans.
- Removal of mortgage insurance: If you have private mortgage insurance (PMI), a refinance may allow you to remove it – depending on the loan-to-value ratio of your home.
- Decreased monthly payments: Securing a lower interest rate or removing mortgage insurance could lead to a lower monthly payment.
- Tax-deductable interest: Mortgage interest is tax-deductible, meaning you could decrease your annual tax liabilities. When cashing out to make home improvements, you can deduct 100% of the loan’s interest.
- Greater control over your money: When you cash out with a refinance, you can spend your money how you please. Other loans, like FHA rehab loans, may limit the type of projects you can complete and how much you can spend on certain projects.
- Lower-credit eligibility: Because the value of your home secures your refinance loan, it may be an option if you have less than perfect credit or if you don’t qualify for other types of loans.
The disadvantages of refinancing for home improvements include:
- Higher mortgage payment: If you cash out your equity when refinancing your loan, it could result in a higher monthly mortgage payment.
- Larger overall costs: Because you will pay interest over the entire term of a refinance, your household projects will end up costing more in the long run.
- High fees: High fees can minimize the benefits of a refinance. It’s important to understand lending fees when considering home improvement refinancing. Always request a loan estimate to understand things like application, origination, payment protection, and points associated with the loan.
- Reduced equity: When you borrow against your equity, you decrease the amount of equity that you have in your home.
- No guarantee of a value increase: While home renovations can increase the value of your home, there is no guarantee that they will.
If refinancing your home will result in a higher mortgage rate or expensive fees, then it may be beneficial to choose another option.
Alternatives to Refinancing Your Mortgage for Home Improvements
Depending on your qualifications, you may be eligible for one of these other methods to fund your home renovation:
- Home equity investment (HEI): Home equity investments allow you to tap into your home equity in exchange for a share of your future home appreciation. There are no monthly payments with an HEI.
- Refinance: Of course, you can refinance your mortgage without cashing out the equity. Refinancing your mortgage with lower interest rates can lower your monthly payments, giving you more funds each month to complete necessary projects.
- Home equity loan: A home equity loan is a secondary mortgage that provides you with a large sum of money. It also comes with a fixed interest rate.
- Home equity line of credit (HELOC): A HELOC may be an option for many homeowners who are considering home equity loans. Instead of a lump sum, a HELOC offers revolving credit, like a credit card, and you only pay interest on what you borrow.
- Home renovation loan: Some lenders offer home renovation loans. These are loans designed specifically for home renovations. However, they tend to have restrictions on how you can spend your money.
- Personal loan: A personal loan may be an option. However, personal loans tend to have higher interest rates and shorter repayment times.
Consider your options when determining how to refinance your mortgage for home improvements.
How to Refinance Your Mortgage for Renovations
If you decide that refinancing your mortgage for renovations is the best way to fund your home projects, then you will want to complete the following steps:
- Calculate how much you need: Determine how much you will need to fund your home renovations.
- Calculate your equity: Understanding how much your home is worth can help you evaluate how much equity you have. A home appraisal or comparative market analysis can help you calculate the equity in your home.
- Check your credit: A good credit score is important to get a good refinance rate. Most lenders require a minimum credit score of 640, while others require a minimum of 680-720. Check your credit scores ahead of time with Experian, TransUnion, or Equifax.
- Choose a lender: Consider the interest rates and fees when you choose a lender. Shopping around for different lenders allows you to compare rates and fees.
These steps can help you plan your project, ensuring that you have the funds you need. It is also important to consider your refinancing eligibility. Each of these steps can help you evaluate your eligibility as well as your fund requirements.If you don’t want to refinance your mortgage, consider a home equity investment with Point. Instead of taking out a new loan with credit and income requirements, Point’s home equity investment allows you to cash out a portion of your home equity. There are no monthly payments with an HEI, so you can focus on remodeling your home to help increase its value. See if you’re eligible to get the cash you need with Point todayTags: Home Equity, Home Renovation