Home improvements are a great way to add value to your house, but they don’t come cheap. In fact, the average homeowner spends about $9,000 on those projects, but depending on what you’re tackling, that number could be much higher. Finding ways to pay for those renovations can feel daunting. A cash-out refinance loan is a great way to cover the cost of those improvements while allowing you to take advantage of lower interest rates.
Refinancing your mortgage isn’t something you should consider lightly under normal circumstances, but right now, it’s well worth looking into. Here’s what you need to know.
What A Cash-Out Refinance Loan Is
A cash-out refinance loan allows you to borrow generally up to 80 percent of your home’s value by refinancing your current mortgage for an entirely new loan. Once approved for the loan, you’ll get a new mortgage at current market interest rates. There are no restrictions on how you can use the money. This means you’re able to use the new loan to cover home improvement costs, pay for college tuition, or even consolidate high-interest credit card debt.
As long as you can make the payments on the loan, you’re free to use the money as you see fit.
Why Now Is A Great Time To Apply
Over the last few months, more homeowners are starting to explore this unique financing option. In January 2020, just 46.71 percent of visitors to our site were actively looking for information on cash-out refinance loans. In May 2020, that number jumped to 59.82 percent.
Why? Because the current loan terms are incredibly favorable. Borrowers can use their house to help pay for improvements that make the property more desirable. It’s an investment in your future and can make your home more marketable should you decide to sell. So, why now? These are a few things that borrowers are accomplishing by refinancing.
Interest Rates Are At Near-Historic Lows
In early 2020, mortgage interest rates fell to near-historic lows. This is excellent news for borrowers looking for their first home loan, but it’s also beneficial for individuals looking for better loan terms on an existing mortgage.
When you refinance for home improvement projects, you’re getting an entirely new mortgage. That mortgage will have the same interest rates as other new loans. If your existing mortgage’s interest rate is high or variable, you’re able to improve your terms and lock in a much lower rate now. This can save you thousands over the life of the loan while also giving you access to the money you need to finance your home improvement projects.
Home Improvements Add Value To Your Property
Refinancing for home improvement projects allows you to add value to your property provided you’re strategic about the projects you take on. This can make a huge difference when you’re finally ready to sell your home.
Again, there are no restrictions on how you can use the money or the types of home improvements you can make. It’s entirely up to you.
Gets You Out Of Paying High Credit Card Interest Rates
Did you know that more than 55 percent of American adults with credit cards carry a balance every month? That balance earns interest each month, and the longer you carry it, the more money you’ll owe the credit card company.
With some cards charging interest rates as high as 24 percent, paying down that balance can be almost impossible. When you apply for a cash-out refinance of your mortgage, you’ll be able to pay off those high-interest credit cards while lowering your monthly payments. This makes it easier for you to get out of debt in the long-run.
There Are Some Downsides
As with any new mortgage loan, some pitfalls can make applying for financing a little less ideal. However, they’re not enough to outweigh the benefits of a cash-out refinance loan for home improvement projects. When you accept a refinance loan, you’re taking out an entirely new loan. This means you’ll need to pay the closing costs on that loan once you agree to the terms.
Your new loan will also increase the amount you owe on your mortgage loan. The more you borrow, the higher your monthly payments will be. Before you accept an amount, make sure you’re comfortable with the new monthly payments.
Only Borrow What You Need
No matter what type of home improvements you’re planning to make around the house, take your time and draw up a list before you apply for a refinance loan. If you’re hiring professionals to do the work, get estimates from several contractors and compare the prices they give you. Prioritize the improvements to add the most value to your home and increase your property’s resale value as much as possible.
Once you have that list, you’re ready to apply for a refinance loan. Just make sure only to borrow what you need rather than the full 80 percent of your home’s value allowed under current regulations. When you borrow only what you need, you’ll avoid going into debt unnecessarily.
Even better, you’ll keep your monthly payments lower so you won’t have to worry about straining your budget.
As Always, Shop Around
Finding the best home improvement loan means you’re going to have to get quotes from at least a few lenders before you decide. Look at the terms, interest rate, and principal amount each lender will approve you for. Go with the lender that gives you suitable terms and the right amount of money.
Should You Refinance To Pay For Home Improvement Projects?
Ultimately, refinancing your mortgage to cover the cost of home improvement projects is a great option. With current interest rates at an all-time low and lenders willing to extend loans to qualified borrowers, now could be the right time for you. However, if your current mortgage loan has better terms or lower payments than the refinance loan you apply for, you may want to hold off. The last thing you want to do is refinance a loan into a higher interest rate.
Are you looking for more insight into the best home improvement loan for your needs? Check out our blog for more information!