You have a beautiful home that you’re proud of. You’ve raised a family there and have had countless pets share your space. Inevitably, its age begins to show. Perhaps you would love a new kitchen, or you’re looking to add a whirlpool tub in the master bathroom. Maybe you’ve come around to the idea that an in-law suite in the basement is a good idea.
Regardless of the project, it’s time to renovate your home. If you do not have the cash available to fund the home improvement, you need two other important resources: equity and credit. If you have equity in your home, there are several types of loans you can obtain to use that equity. Of course, since we are talking about a new loan, you also need to have good credit, as it is easier to obtain a loan if you have a good credit rating.
One of your easier options is to consider a cash out refinancing, where you take out a new mortgage on your home that is more than you currently owe. You are free to use the proceeds however you wish. With a cash out refinance, you generally want to take no more than 75% to 80% of your home’s appraised value. You may get a very favorable interest rate, and the mortgage interest you pay is very likely tax deductible. The downside to a cash out refinance is that you will probably incur closing costs that will reduce your available cash. You are also using your home as collateral for the loan, which, if you were already making your mortgage payments, may not be unreasonable; however, you will likely extend the time for which you will owe on your home. If you are 10 years into a 30-year mortgage and you chose to proceed with a cash out refinance, you could be “starting over” with another 30-year mortgage.
You can also tap into your home equity by taking out a loan or applying for a home equity line of credit (HELOC) based on an appraisal of your home. A home equity loan is generally for a fixed amount with a fixed term and a fixed interest rate. A HELOC works more like revolving credit up to a specified limit. You will generally have variable interest rates, and your repayment amount will depend on your outstanding balance and the prevailing interest rate. When considering this type of borrowing, you need to pay attention to the interest rate environment. If the economy enters a phase where interest rates begin increasing, you may be putting yourself in a difficult position for repayment. Like the refinance option, your home serves as collateral for the home equity loan or HELOC. The good news is that with home equity lending, you may be able to take a tax deduction for mortgage interest.
Generally, the least favorable option is obtaining an unsecured personal loan, which will likely come with a much higher interest rate; therefore, this will very rarely be cost effective. Additionally, the interest paid on personal loans is not tax deductible.
Overall, how you choose to finance a home improvement project is a personal decision that depends on your risk tolerance and how much you are willing to pay over time to borrow money today. A financial adviser can run some numbers for you, estimating how much interest you may pay, what makes sense for your financial situation and the expected return on your investment. You will also want to contact five to six different banks as interest rates, terms and lending policies can differ.
If you have questions on how borrowing money for a home renovation project may affect your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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