How to pay for home renovations

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blog-author-clayjeffreys3

It’s the spring, which means it is time for a home remodeling project. Here’s the big question… how am I going to pay for that new kitchen?… swimming pool?… addition to the home?… etc.

If you don’t have the money on hand, and there is equity in your home, there are two ways to go about getting money to pay for a remodeling project.

Cash Out Refinance – with interest rates as low as they are, a refinance in general could be in order. While doing the refinance, look into a cash out refinance. Depending on the amount of money being taken out, the interest rate is only slightly higher. The max loan to value right now on a cash out refinance is 80% of the value of the home. For example, let’s say the home appraises for $400,000, and the balance on the current mortgage is $220,000. Taking 80% of the $400,000 value is $320,000. When you pay off the balance of $220,000, then there is $100,000 left over to go towards the project.

You are not required to take the full 80%. Maybe the kitchen remodel is only $60,000, so only borrow $280,000 in our example. There’s no reason to do the full amount if it isn’t needed. The rate is fixed for the life of the loan if choosing a fixed rate mortgage option.

If your current rate is over 4.500%, then this could make a LOT of sense as you could take cash out AND get a lower interest rate. A complete win-win.

Home Equity Line of Credit – this is a second mortgage and a bit of a different option. Let’s say you have some money on hand and are unsure of the total cost of the project. Instead of needing a majority of the money, you may only need a little more than what is in your investment accounts. In a situation like that, then a home equity line of credit (called HELOC) may be the way to go.

Using a HELOC, interest is paid only on the amount being borrowed. You can simply open the line and have the money available, like a credit card, and use the line when needed. The total loan to value of both mortgages combined can usually go up to at least 85% of the value of the home.

A potential draw back here is the interest rate. The rate floats with Prime Rate (determined by the Federal Funding rate). Depending on the amount of the equity line, credit scores, etc., the rate is normally “Prime + 1.” With Prime Rate being 3.25% + the 1%, the HELOC rate would be roughly 4.250%. The rate can go up/down depending on what the Feds to with the Federal Funding Rate. If using a no closing cost HELOC, the rate may be more than “Prime + 1.” One other drawback is the fact most HELOCs come with a prepayment penalty.

How to choose between the two? Here are some things to consider:

  • Choose a cash out refinance if you have a firm idea of the project cost, knowing you will need all of the money (no reason to pay interest on money you take out from the refinance if it won’t be used), and if the interest rate will be about the same or better.
  • Choose a HELOC if you are unsure of the cost of the project, already have some funds available, and have a really low rate on the first mortgage and don’t want to lose that rate by doing a cash out refinance.

Trying to decide what is right for you? Ready to apply and get going? If the home is in the state of Georgia, contact me today. We can discuss the pros and cons of a cash out refinance versus a HELOC and choose the one that is best for your situation. Once this is done, hello new kitchen/bathroom/addition to the home!!

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