Home renovations and ongoing maintenance can be costly. With cash-out refinance offers, you can pay for these projects without the need of getting a second mortgage, or typically a higher interest rate of home equity loan, HELOC, or personal loan.
Let us discuss if refinancing your mortgage for home renovations is the best financial strategy for you.
Cash-out Refinance
Let us first talk about cash-out refinance process.
Cash-out refinance enables mortgage borrowers to utilize the equity in their homes in order to get a new, refinanced mortgage. This will be replacing the existing mortgage while converting some of that equity into cash.
This option allows you to borrow more than your original mortgage and receive the difference as cash at closing. It depends on the lender how much you can borrow from the equity. Most likely, lenders let you take out a mortgage that totals up to 80% of your property value.
Your eligibility for a cash-out refinance highly depends on various factors like credit score, home equity, and debt-to-income ratio.
Take note that cash-out refinances differ from second mortgages. Cash-out refinance will become your primary mortgage.
For instance, your home was purchased 10 years ago for $200,000 and you managed to pay $75,000 of the loan. A balance of $125,000 still needs to be settled. Let’s say home prices are now increasing and you found your home worth double. You could get a cash-out refinance for $250,000 and still pay the outstanding balance of $125,000. The remaining $125,000 can then be used for remodeling or renovations.
Pros & Cons of Cash-out Refinance For Home Improvements
Once you have been approved and considered eligible, Alexdoesloans will provide the provide the mortgage loan and funding to use for your down payment. You may choose to receive the DPA either as a grant or as a deferred forgivable second lien loan. DPA as a grant no longer needs to be repaid. While deferred forgivable second lien loan has to be repaid when you sell or refinance within three years.
Alexdoesloans can help you understand your options and select the mortgage that’s suitable for your financial situation. Once found eligible, you can receive the free money in order to help you buy your new home.
Pros of Refinancing for Home Improvement
- Getting a cash-out refinance will be your primary loan. Thus, you will be able to acquire better rates than home equity loan or HELOC.
- With cash-out refinance, you can acquire more cash than personal loan, however it will depend on your home’s value and how much equity you hold.
- Possibly, you could end up with a higher rate than what you are currently paying. But if you purchased your home with lower mortgage rates, you may be able to get a lower rate too.
- You could quickly build back equity if the renovation increases home’s value.
- You could deduct the cost of the improvement from your taxes depending on the type of project improvement you do and how much your house sells for you.
Cons of Refinancing for Home Improvement
- Monthly mortgage payment will be higher than what you have been used to.
- Longer repayment term could result to paying interest that can add up over the years.
- Rethink if it’s wise to extend your mortgage. Going back to a 30-year mortgage puts you at an even older age to pay off your house.
- Mortgage uses your own home as collateral. Failure to settle the monthly payment could eventually end up in foreclosure and you could lose your home. Renovations may increase property value, but the value will be hypothetical until it is sold.
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Is Cash-out Refinance Useful for Any Home Improvements?
With cash-out refinance, you may use the money however you want. But keep in mind as well to use this money wisely since it is the exact amount you have earned over the past years of home payments. Determine which home improvement and renovations could increase your home’s value.
Eventually, you will be selling your home and upgrades to the major components can be highly attractive to potential buyers. For instance, your home’s components need update; it is highly advisable to take care of them first before doing kitchen remodel. Additionally, certain improvements like roof or HVAC systems replacement may get you discounts on your homeowners’ premium insurance.
Conclusion
Like every other type of loan, cash-out refinance can make home improvements possible and affordable for you. Cash-out refinance lets you tap into what is likely your most valuable asset if the costing cannot be covered using your savings.
Cash-out refinance for home improvements come with advantages and disadvantages for some borrowers too. It depends on each individual’s situation whether it is worth getting one or not. Take some time to calculate the cost of home improvement project you want, work with contractors, and get estimates to know the possible cost and where your money could go.
