Paying for Home Improvements with a Cash Out Refinance

Get the Money You Need from Your Home’s Equity

If you’re thinking about improving or renovating your home, you may be wondering what your financing options are. One of these is a home renovation refinance, which allows you to refinance your current mortgage to access equity to pay for home improvement projects. You'll get a new loan for more than you currently owe, repay your existing debt and use the rest for your project.

However, before you decide on a cash-out refi, you'll need to understand how your current mortgage will be affected, the benefits and risks, and how the process works. This guide will help.

Should I Use a Cash Out Refi for Home Renovations?

A cash out refinance can be a great way to use your home’s equity to pay for home improvements and repairs. It replaces your current mortgage with a new one that has a larger loan amount, and you’ll receive the difference in cash, which you can use to pay for renovations.

Since the lender gives you a fixed sum of money at one time, a cash out refinance is a good choice when you want to make major improvements and know how much the work will cost.

Pros of Cash Out Refinances for Home Improvements

When you're deciding how to fund your home improvements, you should weigh the pros and cons of a cash out refinance. Here are some of the biggest benefits.

• You may pay a lower interest rate compared to credit cards or personal loans.
• A fixed interest rate means steady payments for easy budgeting.
• Depending on the amount of equity you have in your home, you may be able to access more money than you would with a personal loan or credit card.
• Improvements or renovations may increase your home’s value.
• You may be able to lower the interest rate on your current home loan.
• You may be able to deduct interest paid on your taxes if your cash out refinance is used for substantial home improvements.

Cons of Cash Out Refinances for Home Improvements

There are also some disadvantages of a cash out refinance to consider. Here are some of the biggest downsides.

• You’ll increase your mortgage amount.
• You'll likely extend your repayment term.
• You’ll likely pay more interest over the life of your new mortgage.
• The interest rate on your new loan could be higher than your existing mortgage’s rate.
• You’ll need to complete a new application, provide income and financial documents, and pay closing costs.

How Much Can I Get for Renovations with a Cash Out Refi?

How much money you can borrow for home renovation will depend on how much home equity you have.

Typically, you can borrow around 80% of your home's total market value, depending on the lender and loan terms. How much you can borrow is affected by the maximum allowable loan-to-value ratio (LTV), loan type, and other factors. For example, customers with a VA loan may be able to tap into 90% of their home's value.

To estimate your home's equity, determine the fair market value of your house and subtract what you owe on your mortgage. If your house is worth $300,000 and you owe $200,000, you have $100,000 in equity. If the maximum loan-to-value ratio on your home is 80%, you could potentially borrow $240,000, which would leave you with $40,000 in cash to use for renovations.

A cash out refinance calculator can help you understand how much this type of loan would cost you so you can decide if it's right for you.

How to Use a Cash Out Refi for Renovations

If you want to use a cash out refinance for renovations, there are a few key steps you'll need to take:

1. Decide on the scope of your project.
2. Research contractors and get quotes.
3. Finalize your contractor and set your budget.
4. Gather your financial documents to apply for a cash-out refinance loan.
5. Shop around with different lenders to compare rates and terms for your new home loan.
6. Decide on a lender and submit a full application with your financial information.
7. Undergo an appraisal of your home to confirm the amount you can borrow.
8. Move forward with closing on the loan, using the funds to pay off your existing mortgage and cover your home improvement work.

Other Ways to Pay for Home Improvements

A cash out refinance isn’t the only way to get money from your home’s equity. You have other home improvement loan options, such as home equity lines of credit (HELOCs) that work like credit cards, or home equity loans.

A mortgage loan professional can help you explore the differences between home equity loans, cash out refis and HELOCs so you can decide which is best for you.

Final Thoughts: Cash Out Refi for Home Improvements

If you have equity in your home, need funding for improvements, and want to change the terms of your current home loan, a cash out refinance loan is a great option. Reach out to Freedom Mortgage today and find out if a cash out refinance loan is right for you.

Freedom Mortgage is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice and should not be construed as such.