Return on Your Investment: Why Refinancing to Pay for a Remodel Could Be a Bad Idea
The Pros and Cons of Refinancing to Pay for Remodeling Projects
Remodeling a home, or even just a part of a home, can require a sizable financial investment. But, most families don’t have an extra $20 to $30 thousand lying around to put into their remodeling projects. One popular way to get the cash that’s needed is to refinance your home (if it has enough equity built up).
But, is refinancing your home always your best option? There are a lot of factors you need to consider before finally choosing this route, because for many families, refinancing for the sake of remodeling can result in negative consequences. Here are the pros and cons of refinancing to pay for remodeling projects.
Benefits of Refinancing Your Home to Finance Your Home Remodel
The benefit of refinancing your home has everything to do with the interest rate that you can get the mortgage refinanced at. If the new loan’s interest rate is lower than your existing one, and you have at least 15% equity in your home, then you may be able to cash-out with the money you need and still enjoy a lower monthly mortgage payment. Again, this all depends on your equity, the interest rate, and the amount you’re adding on to your mortgage.
Disadvantages of Funding a Remodel Through a Mortgage Refinance
It should go without saying that if the current interest rate is higher than what your existing mortgage has, then you will not benefit from refinancing your mortgage because you will ultimately be paying more every month.
The amount you are planning on borrowing over the amount you owe on your existing mortgage also plays a role. The more money you cash-out with, the higher your mortgage payment will be, so there is a fine line to walk here if you want to enjoy the best of all worlds. What you don’t want to happen is for you to get into a situation where you are forced to sacrifice something important, like your retirement plan payment, just to afford your refinance.
Another major concern is the cost of refinancing your mortgage. You will have to pay fees and closing costs, and these can be expensive. Think about how much your closing costs are going to be compared to how much cash you will be gaining.
For instance, if your closing costs are $5,000 and you’re borrowing an additional $10,000 for your remodeling projects, you’re essentially walking away with just $5,000. In such a case, it would be wiser to not refinance and just use the $5,000 you have saved to put toward your remodel.
Refinance or Home Equity Line of Credit?
A home equity line of credit (HELOC) is another popular option that homeowners use to pay for their remodeling projects. Choosing between refinancing and taking out a HELOC ultimately depends on two things – how long you’re planning on living in the home and whether the new interest rate is lower than your existing one.
If you are planning on moving within five years, then a HELOC is usually a better option. But, if you are going to remain in your home for a longer period of time, and you can get an interest rate lower than what you now have, then refinancing may be able to help you save more money over the long run.