Remodeling your kitchen, bathroom, or other home improvements can add increased value to your home. It’s not always possible to cover those high costs. It might take up too much of your savings and putting it on a credit card could cost you a lot in interest charges. If you have built up some equity in your home, a cash-out refinance could be an option.
With a cash-out refinance, your existing mortgage is replaced with a new, bigger loan. You can use the difference between the old loan and the new loan to spend on home remodeling. There are advantages and disadvantages to using a cash-out refinance for home improvement.
Advantages of a Cash-Out Refinance Loan
One advantage of a cash-out refinance is that it allows you to roll all of your debt into one loan. Instead of taking out a separate loan or putting these expenses on a credit card, you can simplify your debt with one loan and one payment. Having one loan can make it a lot easier to manage your finances.
The interest rate on your mortgage could also be lowered through a cash-out refinance. Interest rates may have decreased since you initially purchased your home or your credit may have improved. Keep in mind that refinancing your loan will typically extend the term or number of years you have left on the mortgage.
There are some potential tax benefits with a cash-out refinance to consider as well. If you use your cash-out refinance to make significant improvements on your primary home, you could be eligible for a deduction for the extra interest with the increased mortgage. Be sure to talk to a tax professional first since taxes could get complicated and laws may have changed.
You also have more flexibility with a cash-out refinance on how you can use the funds. The money that remains from your old mortgage can be used any way you wish. For instance, you might use $20,000 on updating your bathrooms then use $10,000 to pay down your credit card debt.
Depending on the type of home improvement the money is used for, the value of your home will likely increase, resulting in more equity in your home and added value.
Disadvantages of a Cash-Out Refinance Loan
A cash-out refinance loan may not be an option for every borrower. If you don’t have equity built up in your home, there won’t be cash available for you to finance a loan. If this is the case, you will have to find an alternative form of financing to fund your home improvement project. The requirements for these types of loans vary so you will need to research them to determine which route to take.
Since you are increasing your mortgage amount, or possibly extending the terms of your mortgage, this puts you more at risk. If you happen to lose your job or experience some other financial crisis, it could make it difficult to afford your new mortgage. Ultimately, this could lead to a foreclosure if you are unable to keep up with your payments.
There are also closing costs that should be considered with a cash-out refinance. These fees could be anywhere from 3% to 5% of the loan amount. You can either pay the cash during the closing process or have the amount rolled into the new mortgage. These costs will increase the amount of your loan. Use a refinance loan calculator to determine your actual loan cost. Having the closing costs amount may help in deciding if you want to refinance your mortgage.
If you are ready for a cash-out refinance on your home, give us a call at 855-465-0753 to get started.
This is not intended to and does not constitute legal advice or financial / investment / tax advice. North American Savings Bank does not make any guarantee or other promise as to the results obtained. You should consult with an attorney or other professional to determine what may be best for your individual needs.