A cash-out refinance for renovation can be a smart choice for consumers looking to complete home renovations.
With a cash-out refinance, you will negotiate the terms of your mortgage and secure a loan in the same way you did with your primary mortgage. It replaces your current mortgage with a new, larger loan. The difference between the old loan and the new one (minus fees and costs) will be yours to spend.
Refinancing to fund custom home renovations may be an appropriate option if you have considerable equity in your home, your credit score is favorable and the value of your home is greater than what you owe on your mortgage.
When considering a cashout refinance you'll want to consider:
- Can you get a better mortgage rate and/or terms by refinancing
- Is the added expense involved (including closing costs) less than the cost to finance your renovation using another type of loan
- Will you break even on the refinance costs before you plan to sell your home
You'll also want to consider why there are several reasons a cash-out refinance may be your best option, although the pros and cons vary depending on your unique situation as well as your home.
A cash-out refinance is that the interest rate with a home mortgage is typically better than you’ll get with other borrowing options since it’s secured. Furthermore, rather than having multiple loans-you’ll only have one simple loan going forward, so you won’t have to manage several new debts. If you took out a second mortgage or personal loan, on the other hand, you would have your old mortgage to service in addition to your new loan.
When you take advantage of a cash-out refinance, you have flexibility on how you use the money you borrow. You can use $20,000 to update your kitchen, $10,000 to udate the bathroom and apply the remaining $5,000 toward paying off your credit card debt, if you wish. By comparison, some loans may require to you use the funds strictly on an approved home improvement project. A cashout refinance doesn't come with any restrictions on how you use the funds making it a flexible option for homeowners.
The drawbacks? You’ll have to pay closing costs and you’ll restart the clock on all of your housing debt, so you’ll increase your lifetime interest costs and have the potential to pay more monthly. It's important to consider that cash-out refinance is limited to cash-out amounts of 80% of your home’s equity.
Every loan comes with benefits and risks. If you plan to borrow for a home improvement project, take the time to sit with an agent to outweigh the pros and cons. Doing so will make it easier to choose the option that is truly best for your specific situation.