Are you planning a home improvement project? If so, chances are you've contemplated how to pay for it. Consider ways to leverage your home's equity rather than maxing out credit cards, liquidating savings or investment accounts, or settling for your remodeler's short-term consumer financing offers.
Cash-Out Refinance.
A cash-out refinance may be a strategic way to pay for home improvements, depending on how much equity is in your home. If a first-lien mortgage already exists, you must pay it off with your new loan. You may only borrow against your home's current, or as-is, value, and you will be required to preserve some of your home's equity. Conventional and FHA mortgages allow you to finance up to 80% of your home's value on a cash-out refinance. VA allows you to finance up to 90% of your home's value using a refinance option that allows cash in hand at closing. Alternative options may be available using non-traditional (a.k.a. non-QM) loans. In addition to making home improvements, the proceeds of your new loan may also be used for debt consolidation or other purposes.
Home Equity Line of Credit (a.k.a. HELOC).
You might explore the versatility of a HELOC (pronounced HEE lock). A HELOC is a line of credit extended by using the equity in your home as collateral. You can use the loan proceeds for home improvements, debt consolidation, or other purposes. If you have an existing first-lien mortgage, you can leave it in place and take out a HELOC as a second mortgage against your property. This is an attractive option for those with low-interest rates on their first mortgages, but it comes with limitations. As with cash-out refinances, you may only borrow against your home's current or as-is value. Unlike other mortgages, you can pay off or pay down your HELOC and re-use it without applying for a new loan. Loan terms vary widely from lender to lender, and some lenders will allow you to finance up to 100% of your home's value. During the draw period, your monthly payments will be based only on the interest accrued, which makes this loan a good fit for those with the self-discipline to pay down the principal balance without being prompted to do so through monthly billing.
Renovation Mortgage.
Most homeowners need to realize renovation mortgages exist, allowing them to refinance their existing mortgage and include additional costs for home improvements. Before you execute another strategy, these loans are worth a look. Various renovation mortgages are available: conventional, FHA, USDA, VA, and even some portfolio programs. The proceeds of these loans may only be used to renovate your home. You select a qualified contractor who provides a bid detailing the scope of work, which is then given to the appraiser. The appraiser uses your contractor's bid to estimate what your home will be worth after the renovation has been completed, allowing you to borrow against the future improved value of your home. Unlike a cash-out refinance, you are not limited to borrowing up to only 80% of your home's value. With these flexibilities, you can borrow more, stretching your renovation budget.
Leveraging your home's equity to finance improvements has its advantages. Interest paid on mortgages may be tax deductible*. Since the costs are amortized over a sizable period of time, absorbing the costs for home improvements becomes more affordable. Often, mortgages provide lower interest rates and overall costs than alternative financing methods, such as credit cards or consumer financing.
* Consult with your tax advisor.
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Jennifer “The Reno Gal®” Goldsby, NMLS 591226, is the VP of Renovation Lending for Diamond Residential Mortgage Corporation
Programs, rates, terms, and conditions are subject to change without notice. Not all borrowers will qualify. Not all products are available in all states. Diamond Residential Mortgage Corporation, 582 Oakwood Ave, Lake Forest, IL 60045, (847) 244-9301. NMLS# 186805. For licensing information, go to: www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/186805. Diamond Residential Mortgage Corporation is not affiliated with or acting on behalf of FHA, VA, USDA, or any governmental body or agency. Equal Housing Opportunity.
