Learn 6 Best Ways to Finance Your Home Remodeling Project
1. Refinance of a mortgage
If you prefer not to take out a loan for your home repair project, a cash-out mortgage refinance could allow you access to thousands of dollars. You use this sort of refinance to access your home’s equity (the value of your home less your remaining mortgage balance).
You obtain a new mortgage with a higher outstanding balance than your present one, and you receive the difference in cash. To qualify for a cash-out refinance, you must normally have at least 20% equity in your house, as this sort of mortgage refinances a higher risk for lenders.
For larger improvements, such as a kitchen remodel or room addition, a cash-out refi may make sense. A rate-and-term could help you lower your monthly payment and free up funds in your monthly budget for modest expenditures (such as new light fixtures or replacing the front door).
This sort of refinancing involves replacing your existing mortgage with a new one that has a reduced interest rate. Keep in mind that this choice will only lower your monthly payment if you prolong the term of your loan (or keep it the same with a lower interest rate).
2. Home equity line of credit
A home equity loan, sometimes known as a second mortgage, is another option for financing a large project. Lenders normally need a loan-to-value ratio of 80% or less to qualify for a home equity loan, which implies you must have at least 20% equity in your property.
For example, if the total worth of your home is $200,000, you must have at least $40,000 in equity. When you take out this type of loan, you will receive the funds in the form of a flat sum of cash.
(Many lenders will not allow you to borrow less than $25,000). Additionally, as with a first mortgage, you may be required to pay similar closing charges, such as loan-processing fees, origination fees, and others. As a result, you may expect to pay an additional 2 to 5% of your loan amount in fees.
Home equity loans, like fixed-rate mortgages, are repaid over time with steady monthly payments. You will normally have a set interest rate, and because they are secured loans (meaning your property serves as security), you may be able to acquire a cheaper interest rate than with a personal loan (more on these in a bit).
Yet, the interest rates on home equity loans are typically higher than those on conventional mortgages, and skipping payments may result in your lender taking possession of your property.
A home equity loan may be a good alternative for your remodeling if you know exactly how much you need to borrow, prefer a regular repayment plan, and would rather tap into your home’s equity than take out a personal loan.
