Refinancing Home Remodeling
Home Remodeling renovations can be expensive and you might not be able to afford the cost of any major home improvement. Refinancing your home mortgage could be a smart move as you look into financing options. For the past several years, real estate prices have been rising. This has led to a rapid increase in equity for homeowners throughout the country. Refinancing your mortgage is a great way to save money on renovations.
Refinancing Your Mortgage
Refinance your mortgage: This means you repay the original lender for the loan and then use a different lender with new terms. You may be required to pay a higher interest rate, a shorter payment term and other closing costs.
Cash-out refinances are possible if your home has enough equity, whether it’s from previous renovations or market growth. You can borrow more than your original mortgage to get cash at closing. Although the amount of equity that you can borrow against will vary from lender to lender, most allow you to take out a mortgage equal to 80% or more of the property’s actual value.
Cash-Out Refinance Example
Let’s say you bought your house five years ago for $250,000. A $10,000 down payment was made and your mortgage payments brought your current home loan down to $200,000. Your home is valued today at $305,000
Most lenders allow for a loan-to-value ratio of 80%. This means that you can refinance your mortgage and obtain a new mortgage at $244,000. The original $200,000 loan balance can be repaid by your lender. You will then have $44,000 to put towards large home renovation projects.
Refinance applications will also consider other factors, such as your income and credit score. Although some lenders might allow you to borrow more that 80% of your home’s worth, this will give you an idea of what you can expect.
A Cash-out Refinance: The Pros and Con’s
Refinancing your mortgage might seem like an easy way to complete your home project. In some cases it may be. However, it is important to understand both the benefits and drawbacks of this type financing for renovation.
Benefits: Cash-out refinancing is a great way to finance home improvements. The interest rates are often lower than personal loans or credit cards. Your monthly payments will be lower if spread over a longer time period. Personal loans usually last for two to five year, but you can refinance a mortgage for as long as you like and can afford.
Cash-out funds are a great way to make your home more enjoyable and increase its value.
Con’s: Be aware of the following financial risks when refinancing with cash-out. Because you have to pay a larger loan amount, your monthly mortgage payment may be higher than it was before. Even though a longer repayment period may seem like it’s spreading the financial burden, the interest you pay over the life of your loan can add up.
It’s also worth considering whether it is a good idea to extend your mortgage. If you’ve been paying your mortgage for more than 5 years, you may be eligible to get a 30-year mortgage.
Last but not least, your home serves as collateral for your mortgage. Although your renovations could increase the property’s worth, this amount will not be realized until you sell it. If you are unable to afford the monthly payments and fall behind with your mortgage repayments, your home could be foreclosed and you may lose it. To avoid financial hardship, you should be comfortable with the amount that has been refinanced.
How much do you need for a large project at home?
Can a cash out refinance cover the cost of large-scale home renovations? It depends on the goals of your project. Remodeling a kitchen can be costly. Expect to spend about $5,000 for minor cosmetic changes like new faucets and lighting. The cost of a complete remodel, including new cabinets, countertops, and knocked down walls, could reach $50,000. A bathroom renovation that goes down to the studs will cost you between $30,000 and $40,000. *
It is smart to evaluate all financing options in order to determine the best way for you to finance your home renovations. Although a cash-out refinance can come with some risk, it is possible to be comfortable with it if there are financial safeguards in place that will allow you to keep up with your mortgage payments.