Should you Refinance for a Renovation?

If you are thinking about remodeling your home, you may be thinking about refinancing your mortgage to get the necessary funds. Today there are several low-interest mortgage programs that make it possible to do so. But is it worth it?

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Keep reading to learn how to decide if you should refinance to make your home renovations.

Can You Save Money?

It sounds crazy to think that you might save money on your new loan after taking more money out to make home renovations, but it happens. If you took your mortgage out several years ago, you may be paying a much higher interest rate than you can get today. If that’s the case, you may be able to take out more money, get that lower interest rate, and have a lower payment.

If you were to take the money out with a personal loan or use a credit card, this wouldn’t be the case. You would still have your ‘higher’ mortgage payment plus you would add more debt with your personal loan or credit card payments. The cash-out refinance may be your best option if you have a high-interest rate already.

If you don’t have a high-interest rate or you won’t refinance your first mortgage, but would take out a second mortgage, this may not be the case. You have to weigh both sides of the equation to see how it would work out for you financially.

Will the Closing Costs Deplete Your Savings?

One area to pay close attention to is the closing costs. If you pay too many closing costs, you won’t really be saving money. You should figure out your break-even point, if you do think you will save money by taking the cash-out refinance.

The break-even point is when you pay off the closing costs and start enjoying the savings of the new loan program. You can figure out your break-even point by:

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Total closing costs/Monthly savings on the new mortgage = Number of months to pay off your closing costs

If the break-even point is more than 5 years down the road, the new loan may be too expensive and not worth using for your home renovation needs.

Will the Renovations Improve Your Home’s Value?

One of the best reasons to tap into your home’s equity is if you can improve the home’s value by making renovations. Keep in mind that not all renovations improve your home’s value, though. Typically, any changes you make to the kitchen or bathroom have a positive effect on your home’s value. However, changes that are considered ‘luxurious,’ such as a pool will have a much smaller effect, if any, on your home’s value.

It’s important to talk to a real estate agent or professional appraiser to see how your impending changes would affect your home’s value. If the increase will be minimal, it may not be worth changing your mortgage and paying those closing costs just for a small increase in value. Instead, you could borrow the money in a personal loan or credit card, avoid the closing costs, and fix up your home, as you desire.

The bottom line is that you need to see how the refinance will affect your financial position. Will you have a higher mortgage payment? It may not be worth it then unless you plan to stay in the home for the long-term and will see a great increase in your home’s value. If you know you can lower your payment and/or interest rate and increase your home’s value, that’s the best time to refinance your mortgage in order to make home renovations.

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