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We’re all spending a lot more time at home these days, so it’s no surprise that we’re investing more money and time into making our spaces work better for us. If you’re looking to make some home improvements, refinancing your mortgage may be the perfect option for you. A simple way to get access to low-interest, tax-free cash, refinancing can help you update your kitchen, add a home office or finally finish that basement remodel you’ve been slowly chipping away at for months. Make note that yes, you’ll have to pay it back as part of your mortgage balance, but you’ll do so at a much lower interest rate than you might otherwise get with an unsecured loan.
What To Consider Before Renovating Your Home
Before you break out the toolbox, hire a contractor or start knocking down walls, there are plenty of things you should consider:
How Long You’ll Live In Your Home
If you’re currently living in your forever home, refinancing to work on home improvements may be a solid investment. If you’re currently in a starter home or a place you don’t see yourself living in the next 5 years, you may want to reconsider. Regardless, it’s important to be honest with yourself. Are these home renovations that you want or ones that you literally need to keep your home safe and comfortable?
Sometimes you have repairs that are necessary and unavoidable, so if you plan to stay in your home for a few more years, a refinance could be the perfect solution. However, you don’t want to refinance only to put in a swimming pool that your kids will quickly outgrow, while you scrape up cash to cover your higher payments plus put away money for post-secondary tuition.
Building Up The Home’s Resale Value
Some home renovation projects can add serious value to your home (renovated kitchen, updated bathrooms), and others do not (installing a pool). Focus on projects that will build up the resale value of your home so you get the most bang for your buck investment-wise.
Paying For Renovations
Fronting the cash to fund a home renovation project can be stressful and is often the reason why projects don’t get completed or even considered. If you’re considering a mortgage refinance to get your home renovations done, be sure to reduce your outstanding credit as much as possible and pay your bills on time before you approach the application process so you can get access to the best rate possible. One of the advantages of using a mortgage refinance to fund your home improvements is that the interest rate is fixed, and you’ll be able to make small, consistent payments for the duration of the loan term instead of having to dig into your savings.
What Improvements You’ll Be Making
Make a list of what you love about your home, and what you don’t. Think about how you use each room and if there are any pain points or areas for growth when it comes to rethinking spaces and how they fit in with your current lifestyle. If you’re planning to do some big home renovation projects that require a lot of cash to complete, a mortgage refinance may be the best way for you to fund those projects without taking away from your other financial goals in the process. If the improvements you’re making are smaller and more manageable cost-wise, it may not be worth applying for a mortgage refinance.
Hiring Contractors Vs. DIY
While the internet often convinces us that we’re more than capable of doing things ourselves to save money, the DIY route can wind up costing you more in the long run if you don’t know what you’re doing, aren’t using the proper tools or simply don’t know the tricks of the trade. Before you opt for DIY to save money, consider the complexity of the project, what tools you’ll need to complete it, how confident you are in your execution and how pivotal this project is in determining the home’s value or function. Before you choose the contractor route, connect with friends/family who have recently completed renovations and see if they can recommend anyone based on your needs and ALWAYS compare quotes to make sure you’re getting the best deal possible. A contractor can be a big expense and choosing the wrong person (from a skill set or even personality standpoint) can cause a lot of extra stress during the renovation project, so be prepared.
Benefits Of Renovating Your Home
While the process of completing renovations can be stressful, the end result should be euphoric. There’s nothing quite like waking up for the first time in your brand-new main bedroom, enjoying your first bath in your brand-new soaker tub or cooking your first meal on your shiny new kitchen countertops.
Return On Investment For Home Improvements
Besides the obvious benefit of you now having the home of your dreams, one of the biggest pros to completing home renovation projects is the value you’ll add to your home. Since purchasing a home is quite literally an investment (and typically the biggest purchase you’ll make in your life), renovation projects that add to its value are always a good thing. Whether you choose to stay put until your kids leave for University, or you’re planning to live there forever, it’s important to consider the return on investment for each home renovation project you undertake.
How To Refinance Your Mortgage For Home Renovations
When it comes to refinancing your mortgage for home renovations, you have a few different options to consider:Use A Home Equity Line Of Credit (HELOC)
A home equity line of credit (HELOC) is a loan that’s structured like a standard line of credit. Generally speaking, it gives you access to 80% of the equity in your home. Most people take out a HELOC as a second mortgage because it can free up a significant amount of the equity of your home. HELOCs are a great solution to paying for home renovations, but be sure to speak with a qualified mortgage specialist to discuss your specific circumstances as they’re not a guaranteed perfect fit for everyone.
Refinance Your Primary Mortgage
Another way to tap into your home’s equity to fund home renovation projects is to refinance your primary mortgage.
You’ll be negotiating the terms of your mortgage and securing the loan in the same process as your original mortgage, except when you choose a cash-out refinance, you’re essentially refinancing your mortgage for more than you owe and pocketing the difference in cash. The more equity you have built up in your home, the more money you can convert to cash. In most cases, you won’t be able to take the full equity value in cash, so for planning purposes, it’s safe to assume you can refinance about 80% of the value. The main benefit of choosing this process over a HELOC is that you’ll be dealing with a fixed interest rate and you’ll have the ability to make small, consistent payments over the long term. If you have solid equity in your home and your credit score is good, a refinance may be the best choice for you.
In order to pursue a cash-out refinance, both you and your home must meet some specific requirements. In most cases you’ll need a credit score of at least 620 but the exact score you’ll need in your specific circumstance will depend on the type of loan, how many units the property has and how much cash you’re looking to take out.
You’ll also need to have a certain amount of equity in your home to qualify. When you apply to refinance, your lender will require an appraisal of the property to determine its value. You can subtract your current loan balance from the appraised property value to determine how much equity you have in your home. While the minimum requirement varies by lender, you’ll typically need 15% – 20% equity.
Your debt-to-income ratio will also be considered when it comes to your application for refinancing. This is calculated by combining all of your reoccurring monthly debt and dividing it by your gross monthly income. While the maximum debt to income ratio will vary by lender, you’ll typically need a number that’s 50% or lower.
Take Out A Second Mortgage
As an alternative to refinancing your current mortgage, some people may choose to take out a second mortgage by borrowing against the equity of their home and using it as collateral. If you’re approved for a second mortgage, you’ll be provided with a lump sum of money to do with as you please. You will be subject to closing costs in many cases and you’ll need to determine if the interest rate is variable or fixed.
Requirements For A Second Mortgage
In order to qualify for a second mortgage, lenders will typically look at five areas:
- Equity is key. The more you have available, the higher your chances of qualifying for a second mortgage.
- Regular bill payments toward things like utilities, cell phone providers, insurance etc. and/or a confirmation letter from service providers.
- Lenders want to verify that you have a dependable source of income to ensure that you can make payments on time.
- Your credit score plays an important role. The higher your score, the lower your interest rates. It’s as simple as that.
- What property you own will definitely come into play. Since looking at other factors like a credit score can make it difficult to properly calculate risk, lenders will look to other sources to secure their investment in case you are unable to keep up with mortgage payments.
Whether you’re daydreaming about an updated kitchen, new flooring, a work-from-home office or a brand new basement living space, refinancing your mortgage can help you create the home of your dreams without compromising your financial stability. If you’re considering refinancing your mortgage to make home improvements, look into your options and consider consulting a professional to ensure you compare rates and get the best possible option for your specific circumstances.