Home has become more important than ever these past few months. It’s our safe space. Being quarantined, though, can make us view home in a new light – and inspire us to make changes to the property to benefit the whole family.
So if you’re considering updating a bathroom, remodeling the kitchen, or making other upgrades, why not refinance your mortgage to renovate your home?
Financing Your Renovation
You have options for financing a renovation. You might want to look for a personal loan or use your credit cards to pay for the work. The problem is that both have high interest rates, so you could end up paying a lot more than the renovations cost.
Taking out a Home Equity Line of Credit (HELOC) is also an option. A HELOC allows you to borrow against the available equity in your home. The good news is you only pay when you spend and can minimally pay back just the interest every month, like with a credit card. The bad news is, you’re accruing amounts to a second mortgage and has to be paid off within the pre-determined loan term.
Your best option to pay for home renovations may be to refinance your current mortgage. Home loan interest rates are historically low. Many people with equity in their homes are refinancing to get cash out, or to lower their monthly payments, or both. A cash-out refinance is the way to go right now.
How Much Cash Will You Need from a Refinance?
Before you can know how much cash to take out with a new mortgage, you’ll need to determine how much your renovation will cost.
Bids from two or three contractors on the scope of work to be completed will let you compare their estimated costs. A good contractor will tell you that no one ever knows what problems they’ll encounter when they start taking apart a house, and advise you to add 10%-20% extra to your budget in case of overages. (Hey, you’ve watched Property Brothers, right?).
You may even want to chat with a Realtor® if you’re thinking of selling your house in the next five to seven years, to make sure your upgrades will give you the return on investment you’re looking for.
Make Your Mortgage Refinance Work for You
A “cash-out refinance” means that you get a new mortgage loan for more than you owe on your current mortgage, then pay the old loan off and take the difference in cash. This is a great way to cover the cost of home renovations because you make your home equity work for you and add value to your home at the same time. You will:
- Consolidate debt into a single monthly payment
- Keep monthly payments as low as possible because of current low interest rates
- Increase the value of your home with upgrades, potentially adding equity quickly
Closing costs on a refinance are much lower than on purchase loans, an average of 1%-3% of the loan. Some of those costs are related to prepaying one or two months of mortgage payments, plus paying property taxes and homeowners insurance into escrow; you’ll get that back through those amounts being applied to your monthly payments.
You can even get a “no cost” refi by rolling the closing costs and fees into the life of the loan. You won’t pay upfront but you will have a higher monthly payment.
Let’s look at an example of how a cash-out mortgage refinance works.
A Cash-Out Refinance Example
Suppose you bought your home for $200,000 with a mortgage of $160,000. You’ve lived there five years and paid the loan balance down to $142,000. Based on prices of similar, recently sold homes in your neighborhood, you believe your home would be appraised at $230,000. That means you potentially have $88,000 in home equity ($230,000 – $142,000, home value minus what you owe).
Let’s say your lender will allow you to take out a mortgage of up to 80% of the $230,000 appraised home value. That means if you qualify for the loan, you can get a new mortgage of $184,000. After paying off the old mortgage of $142,000, you will have $42,000 for home improvements (minus loan fees and closing costs).
As with any new mortgage, you’ll go through the loan process. You’ll need a professional appraisal of your home, proof of your income and assets, and a qualifying credit score to determine the amount of loan you can get and the interest rate you’re offered.
Cash-Out Refinance Advantages
A cash-out refinance can make good sense whether you use the cash to renovate your home, get rid of an outstanding debt, or pay school tuition. And with current low interest rates – particularly if your credit score has improved over the years – you could end up with better loan terms than you started with!
Contact a Capital Bank Home Loans mortgage professional. Our knowledgeable, personable, and experienced loan officers will be able to help you take advantage of the positives and guide you through the refinancing process.