Paying for Home Improvement Projects

 In Qualifying for a Mortgage, Refinancing your Mortgage

Home improvement projects are extremely popular right now, and there’s a very good reason for that.  House values have been going up for years, and it doesn’t seem like there is going to be an end to the increase anytime soon.  That means most homeowners probably have a lot of equity built up in their house.  Home equity is the difference between what the house is worth and what you owe on it.  As an example, if your house is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 worth of equity.

There is a shortage of available houses on the market right now.  Many homeowners who want to move to a bigger or nicer house are worried it will be too difficult to find a new house, so they have decided to stay in their current house and fix it up or even expand it.  Updating kitchens, bathrooms, family rooms, basements, and windows are some of the most popular home improvement projects.  Additions to a home, such as adding a room or outdoor living space are also quite popular.

The big question is how to pay for these home improvement projects.

Home Improvement Payment Options

Credit Cards

Many people pay for home improvement projects by using their credit cards, either to pay for the improvements, or by taking a cash advance.  Although this is simple and easy to do, it is usually an extremely expensive way to pay for things.  Interest rates are typically very high on credit cards, and are even higher for cash advances.

Contractor Financing

Another common way to pay for home improvements is to finance the project through the contractor.  The interest rates for these kind of loans is also typically very high, and the loans are usually short-term, so you don’t have much time to pay the money back, resulting in high monthly payments.

Retirement Account Withdrawals

You can take money out of your retirement accounts if you have one, but there is usually a penalty for early withdrawal from these accounts, and you are taking away your retirement money when you do this, so it’s probably not the best option for most people.

Refinancing to Pay for Home Improvement Projects

If you think about all that equity you probably have in your house, a much cheaper option comes to mind – refinancing you current mortgage and taking out the cash required to pay for the home improvements.  With a conventional loan, you are allowed to borrow up to 80% of the value when you take cash out.  Using the example above (house is worth $400,000 and you owe $250,000), you would be able to borrow $320,000, which is 80% of the value.  You would have to pay off the current mortgage, which is $250,000, and that leaves you with $70,000 in cash to pay for your home improvements.  Your mortgage payment will go up, but the additional monthly cost is typically much less than the other options, and the interest you pay is most likely tax deductible as well.

How to Start that Home Improvement Project

The best place to start your home improvement project is to contact us and have us get you pre-approved for a cash-out refinance.  Once you know how much you can borrow, and how much it will cost, you can begin your home improvement project with confidence, knowing that the cost will fit your budget.  Contact us today!

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