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Refinancing for a home renovation

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    A renovation can renew your home or provide much-needed repairs, but it can be difficult to save up enough money for the project. Even if you have a significant amount tucked away for a rainy day, renovations are often more expensive than expected. Depleting your savings can leave you without emergency funds . A home refinance allows you to use the equity in your home to get the funds you need to help pay for your renovation.

    Benefits of a home renovation

    A home renovation can make your home feel new again. And if your home needs repairs, it can be dangerous to delay. Whether you plan to sell your home in the future or remain there for many years to come, a home renovation can provide a wealth of benefits for you and your family. When planning a home renovation, consider these potential benefits.

    • Return on investment. A kitchen or bathroom remodel is often a major selling point for prospective buyers. Upgrades and updates that add convenience and functionality will likely add value to your property.
    • Additional damage. Home repairs are costly, but putting them off can cost more in the long run. For instance, delaying roof repairs can lead to wall, ceiling and structural damage over time.
    • Make your home more enjoyable. Your home is likely one of the most expensive investments you'll ever make. Adding upgrades that improve the appearance and functionality of your space can make your home a more enjoyable space.
    • Create the space you need. As your family grows, you may feel like your home is shrinking. A home renovation that adds extra bedrooms, bathrooms or living space may be the improvement you need to make everyone comfortable again.

    How refinancing your mortgage can help pay for your renovation

    Home renovations often cost considerably more than expected. How you pay for your home renovation will depend heavily on your financial situation and the size of your project. If you're planning a small change or an emergency repair, a personal home improvement loan or even your credit card might be a good way to cover the costs. If you're preparing for a major renovation or repair, a mortgage refinance can provide more money to help get the job completed, if you have enough equity available in your home.

    What is a home refinance?

    Refinancing is getting a loan to replace the one you have. A home refinance replaces your current mortgage loan with a new one. Refinancing your mortgage to take equity out can also be a valuable tool for helping you afford necessary renovations.

    Benefits of using a home refinance

    Refinancing your home can provide you with a variety of options to pay for your renovations.

    • Refinance loans can provide funds to complete extensive renovations that may increase the value of your home considerably.
    • Refinancing rates are typically lower than other options like personal loans and credit cards, and the interest may be tax deductible. Consult with your personal tax advisor for more information.
    • If you refinance to a lower interest rate, you may be able to get a lower monthly payment. With a lower payment, you could put the money you save toward renovations.

    3 loans you can use to pay for your home renovations

    There are a few ways to use your home’s available equity to get the money you need for renovations. The type of loan you choose will depend on the size and type of your project and your financial situation. Consider these loan options.

    Cash-out refinance

    Replacing your mortgage with a larger loan may not seem like a great idea. Still, it can help you get the money you need for your home renovation. A cash-out refinance allows you to take out a mortgage loan with a balance larger than your current one. Your current mortgage balance will be paid off, and you get the remaining money as cash after closing.

    A cash-out refinance allows you to get the money you need for home improvements without taking out a second line of credit.

    FHA 203(k)

    The Federal Housing Administration (FHA) provides borrowers with a different type of loan to pay for renovations. When renovations include necessary repairs, you may be able to get an FHA 203(k) loan, also called Rehabilitation Mortgage Insurance Program, to cover the project.

    A limited 203(k) loan allows you to finance up to $35,000 into your mortgage to pay for minor remodeling and nonstructural repairs. A standard FHA 203(k) may be used for more extensive remodeling and repairs, requires you to complete renovations that cost at least $5,000 and requires the use of a 203(k) Consultant. Both options and may allow you to finance your eligible repairs and refinance your existing home up to 97.75% of the projected value of your home after renovations. FHA rehabilitation loans can be a good choice for extensive repairs since they allow you to borrow against the value of your home after the renovations are complete.

    FHA loans have certain limitations. Since they're used for necessary repairs and backed by the government, FHA 203(k) loans can't be used for luxury upgrades like a swimming pool. They're restricted to these types of renovations.

    • Structural alterations
    • Improvements that make the home more functional
    • Replacing water or sewer systems
    • Roof and/or gutter repairs
    • Flooring repairs
    • Energy conservation improvements
    • Improvements that enhance accessibility for a disabled person
    • Major non-cosmetic landscape improvements (e.g. water erosion prevention)

    Home equity line of credit (HELOC)

    A home equity line of credit isn't technically a refinancing loan, but it does allow you to use a portion of the equity in your home to secure the money you need for a home renovation. A HELOC is a secured loan backed by your home. This means you put up your home as collateral. If you fail to make payments, you could face foreclosure. A HELOC is a revolving line of credit which means you can get the money you need when you need it. This can be a big help when your renovation costs exceed your original expectations.

    5 steps to refinancing your mortgage for a home renovation

    Refinancing means getting a new loan, so you should plan for your refinance in much the same way as your original mortgage. Take these steps to refinance your home to pay for renovations:

    1. Get your credit score in top shape.
    2. Determine the type of loan that best fits your needs.
    3. Gather documents you'll need to complete the application (such as W-2s, pay stubs, tax returns, investment account statements and bank statements).
    4. Complete the application.
    5. Continue making payments on your current loan until it's paid off.

    3 things to consider when choosing a home refinance

    Refinancing your home is a decision that shouldn't be taken lightly. Renovations have many benefits, but securing a loan isn't always the best solution. When deciding if a home refinance is the best way to pay for your renovation project, consider these factors.

    1. You may end up with a higher monthly payment

    Refinancing your mortgage means restructuring the terms of your loan. Fees like closing costs are added to the new loan as well. If you receive cash back as part of your refinance, you could end up with a higher monthly mortgage payment, a longer loan term, as well as owing more on your home. Discuss these potential costs with your lender so you can determine if you'll be comfortable with the new payment amount.

    2. The purpose of your home improvements

    When you're prepared to take on debt to improve your home, it's time to be completely honest with yourself. Taking on debt to make structural home repairs is a sensible, unavoidable decision. Conversely, making cosmetic changes that may not increase the value of your home may not be a responsible investment. Weigh the long-term value of your renovations against the cost before using your home for collateral.

    3. Is refinancing the best way to accomplish your goals?

    It's important to discuss all your options with your lending advisor before making a final decision. If you're planning a smaller renovation, a HELOC or personal loan might be a better way to get the funds you need. Additionally, if you're nearing the end of your loan term or you have a low interest rate, changing the terms of your mortgage might not be a good idea.

    If you're planning an upcoming home renovation but don't think your savings will cover the costs, refinancing may be a good solution. Speak with a Home Lending Advisor to learn more about your options.

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