01 Oct Should I Refinance for Holiday Home Improvements?
Upgrading Before the Holidays? Refinance Now
No need to panic, but it’s less than 100 days until 2021, which also means that the holidays aren’t too far around the next corner.
The challenges we’ve faced this year will probably reinforce the value of hearth and home, along with overdue family gatherings. Are you looking around and considering some home upgrades this season, maybe even ones that will pay off in the future? Good news – if your home has increased in value then you can tap that equity and use it to fund pending repair or remodeling work. Get to that home improvement project you’ve been putting off, before the relatives arrive!
While there are several ways to financially tackle home improvement projects, a cash-out refinance home loan is often the most practical in the long run. Interest rates are incredibly low right now, making any refinance program worth considering. Depending on your equity and qualifications, refinancing to reduce your monthly payment or loan term will save you money from the gate. However, most renovation or upgrade ventures will involve a bigger ticket than incremental monthly savings will cover.
With a refinance mortgage with cash-out, by leveraging the equity that has accrued since you purchased your home, you can refinance – essentially replace your original mortgage – and pocket the difference in cash.
Other Options for Funding Home Improvements
There are dedicated home equity loan and HELOC (home equity line of credit) options, which lend funds against your home equity. Although none of these options will mandate a change in your current mortgage’s terms or interest rate, the disadvantage is that these are additional loans or second mortgages, which means additional monthly payments that could ultimately increase your risk and debt. The bottom line is that you’ll end up paying a higher interest rate compared to what you would with a FHA cash-out refinance. Also, some programs require you to specify and qualify exactly what the loan will cover, which severely limits the type of expenses it can pay for, while a cash-out refinance is at your discretion.
Another way to fund your home improvements is a personal loan but again, it’s an expensive borrowing option as it incurs higher interest rates. But it’s only natural considering it’s an unsecured loan that’s not backed by any collateral.
Cash-Out Refi Advantages
A refinance home loan is a viable alternative given its key advantages. Chances are good that no matter what your home improvement expenses are, you’ll be able to save each month with lower interest rates, even after the cash payment is pulled from your equity. If your credit is healthy and your LTV (loan-to-value ratio) is good, you may also be able to reduce your monthly mortgage payment by eliminating the PMI (private mortgage insurance) on the original loan.
A low interest, cash-out refinance also allows you to simplify by consolidating your debts for the project rather than adding further to high interest credit cards for miscellaneous renovation expenses.
Without the red tape and restrictions of dedicated home improvement loans, you’re free to spend the cash as you see fit. This can be ideal if, say, you wish to remodel the kitchen and pay down a student loan.
Depending on the investment made on substantial improvements, the remodel could end up being tax deductible as well. Your tax advisor can let you know what the current codes allow.
It would be worthwhile to include a caveat here: A refinance home loan might lead to a higher monthly mortgage rate if you’re going for a high amount of cash-out. So it all comes down to how much cash back are you opting for; the trick is to not go overboard with it.
Increasing Your Home’s Value
Even though you’re withdrawing cash from your current home equity through refinance programs, it’s quite possible to “earn” that money back by increasing the property’s value, depending on the type of project you take on. For example, spending $20,000 on upgrading an outdated heating & air system may add $30,000 in value when it’s time to sell. In fact, if you’re planning to move eventually, the right improvements can bump up that selling price in the future, making the changes all the more enjoyable in the now.
Although not as sexy as granite countertops, a cash-out refinance home mortgage can solve some of the pricey behind-the-scenes, but necessary, expenses that might include:
- Roof repairs or replacement
- Plumbing or septic systems upgrade
- New HVAC
- Hot water heater replacement
- Replacing and upgrading windows and/or insulation to conserve energy
If there are major repairs involved, double check with your home insurance carrier that they’re not covered before investing your own money. Likewise, check to see if some planned improvements will garner a discount on your home premiums.
Of course, there are renovations that will add to your quality of life as well as the future price tag. The home renovations or upgrades that most impact the value of a home, according to the National Association of Realtors, are:
- Kitchen upgrades or total renovations may recoup up to 120% of your investment
- New roofing
- Bathroom renovation or the addition of a new one if needed
- Energy efficient, vinyl windows; tax incentives are often available for planet-friendly upgrades
- New garage door
Another home improvement project that may see increased appeal in the age of social distancing is the outdoor deck or patio. In the warmer states, this could be a fun addition that adds value to your home and holiday season.
We at EnTrust Funding (ETF) encourage you to plan your repairs, remodels or renovations carefully. Determine the scope of your projects and whether they will continue to add value to your property. Be objective and think like a potential buyer before making substantial changes. And if you’re considering a refinance home loan to help those changes come to fruition this year, contact us today!