Why You Should Pay for a Remodel Using Home Equity
Posted On January 14, 2021
Over the past ten months, the kitchen barstools have become your desk chair, and the white cabinets have become your kids’ Crayola canvas. You thought it would just be for a couple of weeks but now your kitchen looks like a kindergarten classroom and your back is paying a stiff price. Though it may be a while until everyone’s back at work, that doesn’t need to mean you can’t get back to the office.
As people have been spending more time at home due to the coronavirus pandemic, home improvement projects have been surging. A common way to fund home improvements is by using home equity. Though there are several alternative loan options, they can put you in deeper debt. But by using a home equity loan through a cash-out refinance, you can actually reduce other debts and loans.
What is a cash-out refinance?
With a cash-out refinance, you use your established home equity to pay off your current mortgage, replace it with a new mortgage that is higher than your current remaining balance, and receive cash for the difference between the two. Though you can use the cash however you please, financial experts recommend you use it for high-return investments like a renovation and/or consolidating high-interest debt.
So, instead of using a credit card or personal loan to pay for the renovation, you could use a cash-out refinance to build that home office (and maybe a playroom), lower your interest rate, and pay off other debts like credit cards or personal loans.
Why not finance with other loans?
Financing home improvements with a credit card is typically a much more expensive alternative. Credit cards have interest rates that are normally anywhere from 12% to 23%, which is much higher than today’s average interest rate on a mortgage loan. Personal loans are less common financing options for home improvements – with only 8% of homeowners choosing this route over the past ten months. Plus, personal loan rates can range anywhere from 6% to 36% and have a shorter repayment period than most mortgages – meaning you will be paying more per month to pay off the loan.
With mortgage rates near historic lows, a cash-out refinance could save you thousands of dollars on interest, and help you get the home office you deserve. For example, if your home is valued at $400,000 and your current mortgage balance is $300,000, you have $100,000 in home equity. With a cash-out refinance, your new loan could be $320,000, giving you $20,000 in cash. To calculate your savings in interest, you can use our mortgage calculator.
Keep in mind that with a cash-out refinance you will also have to pay closing costs and you will be extending the time it will take to pay off your mortgage. Before applying for a cash-out refinance, make sure you have enough equity established in your home. To learn more about the cash-out refinance process or our other loans that can help fund home renovations, contact us today. A little home renovation can go a long way!