How You Can Finance Your Home Renovation

Outdated kitchen. Overrun backyard. Unusable basement space. If you have a home renovation project on the mind, the first thing you have to consider is how you are going to finance it. Here are the most common options to make your dreams become a reality.

Cash 

Paying in cash is the most straightforward financing option, just save until you have enough money to cover the expenses. This will help eliminate spending outside your budget; however, it can also extend your timeline.

Mortgage Refinance 

If you’ve been making payments on your home for a few years and your interest rate is higher than current market rates, you may be eligible for a mortgage refinance, reducing your payments and freeing up some money.

Cash-Out Refinance 

You can tap into your home equity and borrow up to 80 percent of your home’s value to pay off your current mortgage, plus take out more cash to cover the renovations. This option is encouraged only when you’re making improvements that will increase the value of your home, as it can add a lot of interest and fees.

Home Equity

Getting a home equity line of credit allows you to borrow money against the value of your home. You receive usually up to 80 percent of your home’s value, minus the amount of your loan.

Retirement Funds 

Homeowners can consider pulling money from a 401K or IRA account, even though they aren’t specifically meant to cover a home renovation. This option might incur additional penalties or tax payments, but may be worth it when making improvements that will benefit you financially in the long run.

If you do decide to refinance your mortgage to cover renovation costs, we’re here to help! Give us a call today.

What is a Cash-Out Refinance?

Refinancing your home means asking a lot of questions. Like any major financial decision, you want to be sure you have all of the information you need to make the best choice for you and your family. Understanding the way refinancing works can seem overwhelming, but that’s okay! If real estate finance was easy, you wouldn’t need us around. We’re here to help explain a few things that you need to know. 

Today’s Lesson: Cash-Out Refinances

In real estate, there are two basic refinance options: rate-and-term and cash-out refinances. While a rate-and-term refinance could help you save money over time, a cash-out refinance could be a good option for anyone looking for a boost of cash flow in the short term. Cash-out refinancing means that your home equity is converted into cash by creating a new mortgage for a larger amount than what you currently owe. 

For example, if you took out a $200,000 home loan and have paid off $100,000 over time, this means you have $100,000 worth of home equity. If you wanted to convert $50,000 of that equity into cash, you could opt for a cash-out refinance. In this scenario, you would get a new loan for $150,000 — the remaining balance on your original loan plus the $50,000 cash. You pay the balance on the first loan ($100,000) and keep the remaining $50,000. You still owe that $100,000, but you’ll be paying a new lender at a new interest rate.  

Lenders will look at your property’s loan-to-value ratio to calculate how much equity you have, and how much you could potentially cash out. If your home has drastically increased in value since you purchased it — but you’re not ready to sell anytime soon — a cash-out refinance could be a good option. This type of refinance could also be a smart choice if you want to renovate your current home, because you’re essentially using the equity you already have to increase the value of your home. 

Cash-out refinances typically come with much higher interest rates than your initial mortgage, so they’re not always the right option for someone looking to save money long-term. Instead, a cash-out refinance could work for someone looking for extra money in the immediate future. It’s not a get-rich-quick scheme, though. You might be getting a boost of cash right away, but could end up paying more over time. 

As always, make sure you’re working with a team of trusted experts. There are so many individual factors to consider when refinancing your mortgage, and you’ll want someone who has the time to answer all of your questions and make sure your specific needs are meant. If you think a cash-out refinance is right for you, give us a call today!