Your Guide to Refinancing Home Improvement Loans

Home renovations are booming. With the popularity of TV networks like HGTV and the spotlight placed on flipping homes, more and more homeowners are looking to make their houses magazine-ready.

In fact, nine out of every ten homeowners plans on doing a home renovation in the next two years—but how do you pay for these improvements? Remodeling a kitchen can easily cost more than $10,000 when all is said and done.

Many homeowners are turning towards refinancing home improvement loans to use the equity in their homes for cash. Here we tell you all about refinancing home improvement loans so you can decide if that’s the right route for you.

How Does a Refinancing Home Improvement Loan Work?

These loans, also known as cash-out refinances, use the equity you’ve already built up in your home and turn that into cash.

Say you’ve been paying your mortgage for ten years. That means you have about a third of the total amount paid off. You can refinance and get cash out of that third to complete your home renovations.

You won’t be able to take it all out as cash, as banks require you to leave some equity in the home, but you can take the portion you need for your renovation. That loan amount will get added to your mortgage term, and you’ll continue to make your monthly payments as usual.

While you’re adding additional payments onto your mortgage, this cash is tax-free and at a much lower interest rate than other types of loans.

Options for Refinancing a Home Improvement Loan

You don’t have to take a cash-out refinance to complete your renovations. There are other options.

You could get a personal loan and not have to leverage your home. You could apply for a home improvement credit card and pay that off after completing the improvements.

There’s also the option of taking out a home equity line of credit, or HELOC. HELOC is like a personal loan, but it leverages the equity of your home without changing your current mortgage.

These are all solid options if you plan on selling after the renovations are complete. You’ll be able to pay off these debts right away and not pay a ton in interest. If you plan on remaining in your home for many years after the improvements, refinancing is a better choice because you’ll save on taxes and interest.

What Are the Advantages of Refinancing to Pay for Home Renovations?

While we have already covered some of the advantages, let’s go over them again. Here are all the benefits of refinancing to pay for home renovations:

  • The money is tax-free
  • You get credit for payments you’ve already made
  • The interest rate is much lower than other loan options
  • You do not have to pay a separate payment — it just rolls into your current mortgage
  • It allows you flexibility in the amount of money you can borrow against the equity

Are There Any Disadvantages?

Every loan has some cons, and there are definitely disadvantages to refinancing for home renovations. Here are the top ones:

  • The refinance will usually make your mortgage payment higher
  • There are sometimes hidden fees in completing the refinance that outweigh the benefits
  • To carefully analyze the numbers, you need to get total cost estimates from a few different lenders to see who has the best deal

Requirements for Refinancing a Home Improvement Loan

Qualifying for a refinance depends a lot on your personal financial profile. Do you have a high credit score? How much of your mortgage have you already paid off? How much debt do you have?

If your credit score puts you into a higher risk category, there are government programs that can help you qualify for a refinance. Government assistance with the FHA program is your best bet for qualifying.

If you have excellent credit, then a conventional refinance is ideal, though keep in mind that you will still have qualify for the loan. If you have credit card debt with multiple high payments, debt consolidation may be necessary—but that can be a great way to take advantage of lower interest rates anyway.

Renovating Your Home with a Refinance Is a Good Idea

Overall, the benefits of a refinance are phenomenal and will allow you to boost your home’s equity through improvements.

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