How to Finance Your Home Remodeling Project

10:33 AM, Jul 17, 2019

Many Colorado families are choosing to remodel their homes to get the space they need without having to leave the neighborhood or school district they love. With Denver home equity continuing to rise, many homeowners can access the cash they need for remodeling projects simply by refinancing their mortgage. And with 2019 mortgage rates near all-time lows, a mortgage refinance is even more attractive.

Understanding home equity

Equity represents the portion of your home that you own yourself. In other words, it’s the current market value of your home minus your outstanding mortgage balance. You help it increase as you pay down your balance or make home upgrades, though it can also grow on its own with the real estate market as home prices rise and the economy strengthens.

Access equity with a cash-out refinance

A cash-out refinance is a popular way to pay for home remodeling. It helps you use the money you’ve already paid into your mortgage to improve your home. The more equity you have, the more money you may be able to get from a cash-out refinance.

With a cash-out refinance, you’re replacing your current loan with a new loan at a higher amount to convert your home equity to cash. Depending on your property’s loan-to-value ratio and the amount of equity you have, the lender will set a maximum on how much cash you can take out.

Renovating vs. home remodeling

Before moving forward with a mortgage refinance to access cash, you must first understand your home improvement goals. Are you looking to renovate or remodel?

Renovating is when you make cosmetic changes. You’re basically doing projects to make the room more attractive, which often means you’re looking at a more affordable home improvement project.

On the other hand, remodeling is when you completely change a structure or layout for design or aesthetic purposes. For example, if you are gutting your house or adding square footage, then you are remodeling.

Does moving make more financial sense?

Some homeowners may wonder if moving makes more sense after all, mortgage rates are low and equity is up. It may be more beneficial to sell your current home, and finance a move-in ready home with a new rate. Then you can avoid the stress that can accompany major home improvement projects.

It certainly is another option that will work great for many homeowners. But for those who love their neighborhood or have strong ties to their home, refinancing to access cash for renovations is an equally good, and affordable, idea. Plus, you don’t have to worry about buying and selling a home at the same time, which can also be stressful.

Other ways to finance your projects

A mortgage refinance is not the only way to pay for a home remodeling project. You can, of course, use credit cards or personal loans. Or, you can access your home equity in other ways, such as a home equity loan or home equity line of credit (HELOC).

Both options act as a second mortgage that can be a one-time lump sum payment or line of credit. These loans usually offer fixed rates, so you know precisely what your monthly payments will be when you take one out.

The bottom line

Strategic improvements that increase your home’s market value will add to your equity, making it easier to recoup your costs. Just be mindful of how you finance your projects. If you’re leaning toward a mortgage refinance, shop around for rates and ask your lender if they can refinance your loan without restarting your term. Custom loans can save you tens of thousands of dollars in interest in the long run. On the other hand, if you start back to 30 years, you may be putting yourself in a worse financial situation.

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