Home renovations can cost a lot of money, and you may not want to empty your savings account to pay for them. To explore your financing options, you might consider refinancing your mortgage. Home prices have been on an upward trajectory for the last several years, resulting in fast equity for homeowners across the country. Here are the pros and cons of refinancing your mortgage to pay for home updates.
Refinancing Mortgages
When you refinance your mortgage, you pay off your old mortgage and take out a new loan with completely new terms. The new interest rate is ideally lower, but your payment term, closing costs, and cash-out amount also change. To refinance your first mortgage, you will likely need to have built up enough equity in your home. This varies by lender, but most let you borrow up to 80% of the property value.
Cash-Out Refinancing
Imagine you bought your home five years ago for $250,000; you made a $10,000 down payment, and your mortgage payments have brought down the loan balance to $200,000. Today, your home is valued at $305,000. That means you could potentially refinance and get a new mortgage worth $244,000. Your current lender only needs to be repaid the original $200,000 balance. With that $44,000 in cash, you could renovate your new home with a modern kitchen or remodel the bathroom.
Home Renovation Budget
Can a cash-out refinance really cover the costs of a large home renovation? Obviously, it depends on your philosophy of home remodeling. Renovating a kitchen can take the highest expenses. Minor cosmetic upgrades, like new faucets and hardware and paint, can cost $5,000 or less. A complete overhaul with new cabinets, countertops, and knocked-out walls can cost $50,000 or even more. A bathroom renovation could cost between $30,000 to $40,000.
Advantages and Disadvantages of Refinancing
Refinancing your mortgage to pay for home improvements may seem like an easy solution, but it isn’t the best choice for everyone. Before making a final decision, consider both the advantages and potential disadvantages of renovating your home using this type of financing. If you want to improve your home, the way to go is cash-out refinancing. Interest rates are typically much lower with a cash-out refinance compared to a personal loan or credit card, and your monthly payment could be more affordable since it’s spread out over a longer-term. Personal loans have a repayment period of a few years, while you can refinance your mortgage for any term you’d like—up to 30 years. A cash-out refinance helps improve your home in a way you get to enjoy, and it could also increase the value of your property.
There are a few financial drawbacks to consider when you’re considering a cash-out refinance. First, you’ll be paying a higher monthly note than you were before, which is because you’ll need to pay off the entire loan. Additionally, a longer repayment term means you’ll pay interest for more years, which can add up quickly over the life of the loan. Another point to consider is whether it’s wise to extend your mortgage. For example, if you’ve already paid off 5 or 10 years of house payments, going back to a 30-year mortgage puts you at an even older age to pay off your house.
Mortgage City is Here For You
We hope this article proves to be useful when it comes to furthering your understanding of how refinancing can help you with your home renovations. When you need to raise money for home renovations, it is smart to weigh all your financing options, including a cash-out refinance loan. If you need to know more about mortgage refinance rates in Michigan and beyond, then you have come to the right place. Get in touch with us today at (248) 930-8709 to learn more about refinancing your home loan with Mortgage City.
