TABLE OF CONTENTS

    Your home isn’t just where you live—it’s an investment. As with any asset, the goal is to enhance its value over time. Refinancing for home improvements allows you to channel new funds into home renovations or upgrades to increase its value, allowing you to sell it for more in the future. 

    In the past couple of years, we’ve seen record levels of homeowner equity, which can lead to growth in the remodeling market. That’s because homeowners with high levels of equity in their homes can borrow against that equity to fund remodels and home improvement projects. 

    While the remodeling industry is seeing the pandemic-era spike in demand begin to equalize, the demand for home remodeling services is still strong. That’s because the right home improvements can make your house comfortable, more aesthetically pleasing, and, perhaps most importantly, more valuable. This is especially important as the remote work trends continue to expand and more people spend more time in their home — which, consequently, encourages more spending on the home. 

    Making improvements and upgrades to your home over time is not only necessary, but can also be beneficial for the value of your home equity. Refinancing for home improvements enables you to tap into your equity and access the capital you need to make the renovations you want. 

    However, like any financial move, mortgage refinancing for home improvements has advantages and potential pitfalls. Keep reading to learn more about this strategy and determine if refinancing makes sense for you.

    KEY TAKEAWAYS

    • Refinancing for home improvements increases your home’s functional value and aesthetic appeal and can raise its market value.
    • A cash-out refinance allows homeowners to tap into their home equity by replacing the current mortgage with a new, large one and utilizing the difference to invest in home improvements.
    • While refinancing offers benefits like increased property value, it also comes with potential disadvantages like closing costs and the loss of equity. 
    • Beyond cash-out refinancing, homeowners can explore other financing options such as home equity loans, HELOCs, credit cards, and personal loans for funding their home improvement projects.

    How Does Refinancing for Home Improvements Work?

    Refinancing for home improvements is known as a cash-out refinance. This type of refinancing loan replaces your current mortgage with a new one for a larger amount than what you owe on your house. Here’s how it works: 

    • Equity evaluation: Equity evaluation: The first step is understanding the equity you have in your home. You can find your equity by subtracting your outstanding mortgage balance from the value of your property. For instance, if your home is valued at $400,000 and you owe $200,000, you have $200,000 in equity.
    • Determine the loan amount: In a cash-out refinance, the amount you can borrow is based on your equity. For example, if you wanted to access $50,000 for home improvements, your new mortgage would be $250,000 ($200,000 existing mortgage + $50,000 cash out). 
    • Closing the old mortgage: Once approved, the new loan will pay off your existing mortgage. 
    • Receive the cash: After paying off your original mortgage, the remaining amount is given to you as a lump sum. This money can then be used for home improvements. 

    Remember, you’re essentially replacing your old mortgage with a new one, so your loan balance will be higher, and the terms might be different. You may get a different interest rate, and the loan duration could change. 

    However, you can now finance your desired home improvements, which can range from remodeling a kitchen to adding a new room, making upgrades, investing in landscaping, installing a pool, and much more. 

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    Pros and Cons of Refinancing Your Mortgage for Home Improvements

    A refinance home improvement loan allows you to tap into the equity in your home to complete significant renovations. However, as with any financial decision, there are advantages and disadvantages to consider. 

    Pros of a cash-out refinance

    Advantages of refinancing your mortgage for home repairs and renovations include the following:

    • Potential for lower interest rates: If market rates have decreased since you obtained your original mortgage, a refinance can secure a lower rate, saving you money in the long run. If interest rates have not decreased, then you may want to consider debt consolidation along with the cash needed for the home improvements. You need to know your blended rate before weighing this option.
    • Increase home value: Home improvements can significantly boost the value of your property, potentially offering a high return on investment. 
    • Tax benefits: The interest on the cash-out amount of your refinance might be tax-deductible when used for home improvements. Discuss tax benefits with a CPA or tax advisor to learn more.
    • One loan: Instead of having a separate home improvement loan, you’ll be able to manage a single mortgage to simplify your finances.

    Cons of a cash-out refinance

    Like all financial decisions, a home improvement refinance loan comes with potential disadvantages, such as: 

    • Higher mortgage debt: When you refinance for home improvements, you’ll owe more than you did before, which can be a concern if property values drop or your financial situation changes. 
    • Closing costs: You’ll have to pay closing costs when refinancing your mortgage. Keep in mind that closing costs vary depending on several factors, including loan type. For instance, closing costs on a VA cash-out refinance loan will differ from traditional refinance loans. 
    • Longer loan term: If you refinance into another long-term loan, you might extend the amount of time it takes to pay off your home.
    • Potential for higher interest: If market rates have risen or your credit score has dropped, you might end up with a higher interest rate than your original loan. Keep in mind that home refinance loans often have much lower interest rates than other financing options, such as credit cards and personal loans, so you’ll still save on interest.
    • Loss of equity: Tapping into your home’s equity means you’ll have less stake in your home, which can be risky if the housing market declines.

    Female lender speaking to African-American man about refinancing for home improvements.

    How to Qualify for Home Improvement Refinancing

    Securing a cash-out refinance for home improvements entails meeting specific qualifications set by lenders. These criteria ensure borrowers have the financial capacity to handle the new, larger loan. While lending requirements vary by lender, here are a few general requisites: 

    • Home equity: Most lenders require homeowners to maintain a certain percentage of equity after the cash-out refinance, often around 20%. 
    • Good credit score: While specific requirements vary, many lenders look for a score of 620 or higher for cash-out refinancing. 
    • Stable income and employment: Consistent employment and a stable income history can demonstrate your ability to manage a larger loan. 
    • Debt-to-income (DTI) ratio: Lenders typically prefer a DTI of 43% or lower, although there can be some flexibility based on other strong qualifications. 
    • Appraisal: The appraisal helps lenders determine how much they’re willing to lend and ensures the property’s value supports the loan amount. 

    Should You Refinance for Home Repairs and Improvements?

    Whether you refinance a mortgage for home repairs and improvements largely depends on your financial situation and overall goals. Refinancing is enticing to many homeowners. However, this decision shouldn’t be made lightly. It’s best to evaluate various factors to ensure this option is right for you. Consider the following: 

    • Scope and cost: Begin by outlining the specifics of the home improvements you’re considering. How extensive are they, and are they essential repairs or aesthetic upgrades? Getting quotes from contractors can give you a better idea of how much money you’ll need to borrow.
    • Current home equity: Evaluate the amount of equity you currently have in your home. If you have substantial equity, a cash-out refinance can be more accessible. Remember, most lenders will require you to retain a certain percentage of equity. 
    • Interest rates: Compare your current mortgage interest rate to the prevailing market rates. Refinancing can be advantageous if rates have declined since you secured your original loan. If market rates are higher, think carefully about the long-term implications. Know that if interest rates are higher than your original loan, you still have options to consider.
    • Closing costs: As we’ve mentioned, refinancing isn’t free. There are costs involved, which can range from 2% to 5% of the total loan amount. 
    • Loan term extension: Consider how refinancing for home improvement might reset the clock on your existing mortgage. Extending the loan term means being in debt longer, which could potentially offset any interest savings. Know that there are options to refinance to the same exact term you have now or a shorter term if desired.
    • Increase in home value: Many improvements can significantly enhance your home’s market value, making the refinance a worthy investment. On the other hand, overly personalized or niche renovations may not yield a substantial return on investment.
    • Long-term plans: If you plan on staying in your home for many years, investing in improvements and refinancing may be more justified. However, if you foresee a move in the near future, you may not recoup the costs of refinancing and renovations. 
    • Timeline: Refinancing requires a certain timeframe. Many homeowners often ask, “How long does a mortgage refinance take?” Generally, refinancing can take anywhere from 30-45 days from application to closing. If you’re undertaking time-sensitive renovations, considering the timeline is crucial.

    Cash-Out Refinance Alternatives for Home Improvements

    While a cash-out refinance is a popular method to refinance home improvements, it’s not the only option available. Depending on the scope of the project, your financial situation, and long-term goals, other financing methods might be more suitable. Here are a few alternatives: 

    Home equity loan

    A home equity loan allows homeowners to borrow against the value of their home’s equity, typically providing a lump sum. Unlike other options, home equity loans have a fixed interest rate, ensuring consistent monthly charges. The difference between a home equity loan and a refinance is that a home equity loan is a second mortgage, so you’ll be responsible for paying two loans. Compare second mortgage vs. refinancing to determine the best option for you. 

    Home equity line of credit (HELOC)

    HELOC operates more like a credit card, granting homeowners access to a revolving line of credit based on their home equity. This can be a better option if you want to borrow only what you need. For instance, if you’re unsure about the total cost of your home improvement project, you can draw funds periodically. 

    Credit card

    While not traditionally seen as a home improvement financing method, credit cards can be useful in certain situations, such as relatively minor renovations or DIY projects. However, keep in mind that the interest rate on your credit card will be much higher than that of your cash-out refinance loan. 

    Personal loan

    Unsecured personal loans don’t require home equity, so they might be a good option for homeowners who haven’t built up a significant amount of equity but still want to undertake improvements. Personal loans also have fixed interest rates and defined payment terms, offering predictability. 

    Refinance to Boost Your Property’s Value

    A refinance home loan for renovations, repairs, and improvements can enhance your living space and potentially increase your property’s market value. You can undertake significant home improvements by tapping into your home’s equity. Still, with any financial endeavor, it’s essential to approach refinancing with a clear understanding of the costs, benefits, and market conditions. 

    Navigating refinance loans for home improvement is simple with a trusted partner by your side. Griffin Funding offers homeowners a clear roadmap through this process. Our seasoned professionals can guide you in assessing the viability of a mortgage refinance to ensure the design aligns with your goals. Apply for a mortgage online today.

    Frequently Asked Questions

    What can I use a cash-out refinance loan for?

    The money gained from a cash-out refinance can be used for anything. They’re not like a traditional mortgage that covers the cost of a house; instead, you can use them to fund home improvements, consolidate debt, cover educational expenses, invest in real estate, and secure the money for significant life events like weddings. The flexibility of a cash-out refinance means homeowners can allocate the funds in ways that best fit their needs and goals.

    How much money can I get using a home improvement refinance?

    The amount of money you can access through a home improvement refinance depends on your home’s equity. Lenders typically allow homeowners to borrow up to 80% of their home’s value, but this percentage can vary based on the lender and your financial circumstances. For example, if you are a veteran, you can get 100% of the value of the home with a VA loan, or, if you’re doing a HELOAN, you can get 90% of the value of the home.

    How much equity is required for a home improvement refinance?

    For a home improvement refinance, lenders usually require homeowners to retain a certain amount of equity in the property after the refinancing process. Most lenders stipulate that borrowers should maintain at least 20% equity in their homes.
    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.