Are you longing to remodel your home? You’re certainly not alone! According to NerdWallet’s 2020 Home Improvement Report, 61% of American homeowners have taken on various home projects since March 1, 2020. However, before you can join this tall list, you will need to consider how to finance your home improvement project. After all, home renovation costs are no joke, and many people don’t want to spend their cash reserves on them. Enter home remodel refinance!
Let’s explore why cash-out refinancing is a great option for homeowners looking to remodel their houses!
What Is Mortgage Refinancing?
Refinancing your mortgage essentially means paying off your loan to your original lender and finding a new lender to establish new loan terms. It often includes a lower interest rate, a new payment term, and a few closing costs. You can apply for a cash-out refinance if your home has enough equity due to market growth and previous renovations. With this type of refinancing, you get more than your original mortgage and receive the difference as cash at the deal closing. The amount of home equity you can borrow against will vary from lender to lender, but most of them will give you the option to get a mortgage that equals up to 80% of your property’s value.
As an example, let’s assume you bought your home around five years ago for $250,000. Your fictional down payment was $10,000, and your mortgage payments have your total mortgage amount down to $200,000. Finally, your theoretical home’s value has risen to $305,000.
Since many lenders are willing to give an 80% loan-to-value ratio, you might be able to refinance this example home and get a new mortgage amount of $244,000. This way, you can pay off your old lender for $200,000 and get the remaining $44,000 as a cash-out refinancing amount. You can use that amount for financing your remodel project. Naturally, the refinancer will consider other factors, such as your income, overall debts, credit score, etc., before approving the loan. But this example gives you an idea of what you might expect.
Reasons to Choose a Remodel Refinance
Here are some compelling reasons to consider a remodel refinance strategy:
Lower Interest Rates
Refinancing will enable you to benefit from a lower mortgage rate. Moreover, your improvement costs will become part of your new mortgage amount. You could borrow more without changing your monthly mortgage payment.
While it might not be as beneficial as a 0% introductory APR credit card, a renovation refinance will give you a higher borrowing limit. You will also have to pay less interest than you would have spent on a personal loan for the same amount.
More Manageable Monthly Payments
With the right cash-out refinance terms, your monthly payments can become more affordable since the loan repayment plan will be spread out over a longer time. Personal loan terms typically range from two to five years, which means that you typically have to pay more each month to repay the loan. On the flip side, you can choose to refinance your mortgage at any term you can afford and prefer up to 30 years.
Remodeling Is More Accessible Compared to Buying
According to NAR’s profile of homebuyers and sellers, around a third of homebuyers in 2021 bought their homes above the asking price. Moreover, according to Redfin, the usual home sold in merely 15 days in 2021. Meanwhile, over 60% of the houses went off the market in two weeks.
Due to the continued surge in home prices and the stiff competition in the real estate markets throughout the country, remodeling is proving to be more accessible compared to buying a home. Multiple offers and bidding wars or unsold homes have led people to stay in their current homes and renovate them according to their needs.
Your Home Will Become More Valuable
A smart home renovation will boost your property’s value. A 2019 report from the National Association of the Remodeling Industry and NAP found that replacing outdated cooling and heating systems and even upgrading insulation provided homeowners some of the best ROI when selling their homes. Even when not selling the property, these updates can result in lower utility bills.
So, when you take out a cash-out refinance, you can use the cash to renovate your property. This way, when you sell it down the line, you can benefit from a higher amount than you would have gotten without any property renovations.
Things to Remember
Even though a refinance remodel amount will help you renovate your home, you will have to deal with a longer repayment term than your original mortgage term. It means your financial burden will be spread out, and you will have to wait to pay off your home loan. Your mortgage will use your house as collateral, so even though your renovations will elevate your property’s value, you will not be able to benefit from that rise until you sell the house. Your refinancing strategy should be based on the premise that you can comfortably pay your new monthly payments to avoid a possible financial burden.
Lastly, you should certainly look into mortgage cash-out refinancing for your home renovation project if you have a financial safety net that will help you safely and timely pay your monthly mortgage payments throughout the new loan term. Moreover, you should explore your option of choosing a mortgage expert that can guide you toward refinancing options based on an acute assessment of your finances and expectations.
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