By Matt Allen
Vice President, Portfolio Lending (NMLS #415037)

Use Your Cash-Out Refinance for Home Improvements

Mar 17, 2020

  • Cash-out Refinance
  • Refinancing

Remodeling your kitchen, bathroom, or other home improvements can increase your home's value. 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.

A cash-out refinance replaces your existing mortgage with a new, bigger loan. You can use the difference between the old and new loans 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 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.

A cash-out refinance could also lower your mortgage interest rate. 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 to consider with a cash-out refinance. If you use your cash-out refinance to significantly improve your primary home, you could be eligible for a deduction for the extra interest on the increased mortgage. Be sure to talk to a tax professional first, though, since taxes could get complicated and laws may have changed.

With a cash-out refinance, you also have more flexibility in how you use the funds. The money that remains from your old mortgage can be used any way you wish. For instance, you might spend $20,000 on updating your bathrooms and then $10,000 to pay down your credit card debt.

Depending on the type of home improvement the money is used for, your home's value will likely increase, resulting in more equity 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, cash won’t be 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 must 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 at greater risk. If you 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 cannot keep up with your payments.

Closing costs should also be considered with a cash-out refinance. These fees could be anywhere from 3% to 5% of the loan amount. You can pay the cash during closing or roll the amount into the new mortgage. These costs will increase the amount of your loan. Use a refinance loan calculator to determine your actual loan cost. Knowing the closing costs amount may help you decide if you want to refinance your mortgage.

If you are ready for a cash-out refinance on your home, call 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 guarantee or promise the results obtained. The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges.