There are some pros and cons of refinancing your home to make some home improvements that will need to be discussed if you want to make an informed decision. Before even considering that you will need to know if the equity you have built up is even worth going through the hassle of getting a refinance loan. You will need to get a current value inspection and follow the equation below.
- Current appraised value – Mortgage balance = Home Equity
It is that simple to figure out your equity. Many banks will require that you have at least 20% of the value of the home. Otherwise, they will not offer you the loan you want. If you meet this stipulation, go ahead and continue reading. If you don’t, wait a year or so and then recheck your equity.
Now, let’s jump into the pros and cons of refinancing for a home improvement project.
Pros Of Refinancing For Home Improvements
There are numerous advantages to refinancing for a project such as this. Some may apply to you, while some may not. You will have to pick and choose the ones that relate to your specific situation.
- If you have been trapped in a high rate of interest home loan, you may get a lower rate on a refinance loan, along with giving you enough extra money to remodel your home. The thing that you need to watch for is when the market rates go down to a lower level. When you see that happen, jump at it and get yourself a better loan with a cash-out option to get the work done that you are contemplating.
- Any type of work that you do to the home will increase the value of the house, especially if the work is planned in one of the areas that have a significant impact on the home. Examples would be the kitchen or bathroom upgrades or more square footage added to the original floor layout.
- When you do a cashout loan, you will know exactly what your working budget is. The amount you have left over after you pay off the other loan, and pay the closing costs of the new loan, will be what you can put into the project. Unless you have additional cash available to use, this will be the limit of your budget.
Cons Of Refinancing For Home Improvements
When contemplating a refinance home loan to complete some renovations, you need to weigh the bad with the good, and then decide if the project is worth the effort it will take to get another loan from a lender.
- If your home is your only investment, it may not be a good financial move to refinance at this point in time. You never know when something may come up, such as a severe illness or a layoff. You would need the equity to help you get through any of these issues if they come up. Since the home is the only way that you have to raise large amounts of money quickly, you may want to reconsider taking out a refinance loan.
- If your credit score has gone down, you will look at a new loan that has been adjusted for this change, but not in a good way. Your credit score going down will make the loan a higher risk for the lender, creating a circumstance in which your new loan will have higher interest rates than the original. This is not a good trade-off.
Final Thoughts
If the circumstances are correct, taking out a refinance loan to make some home improvements is an excellent idea. If you find that the cons above are more than you are willing to chance at the moment, take a few months to ponder over everything and work on the problems that made you back out of the loan.
Revisit the idea at a later date and see if things have changed. If not, wait some more. If it has, jump at the loan if everything is falling into place in a good way.
