The longer people are in their homes, the more they want to improve them. From significant upgrades to minor repairs, they will be planning for these expenditures for many years to come. People need to remember that they have other options when paying these expenses besides a savings account or credit card.
Cash-outs refi can help individuals turn their house equity into physical money. As property values continue to go up, a lot of property owners are choosing this scheme to remodel their house, update their bathroom, finishing a basement or man-cave, or remodel their kitchen.
It is one of the easiest ways to re-invest some cash in the house – at the same time, take advantage of today’s lower interest rates (IR). But does a remortgage for house improvement projects make a lot of sense in certain situations? And what alternatives might people consider? This article will answer these important questions to understand refinancing.
Advantages of refi for house improvements
Lower borrowing costs
A lot of homeowners took advantage of today’s record-low housing loan rates during the COVID-19 pandemic. Some homeowners were able to lower their amortization, shorten their term, as well as pay off some of their debts. Some individuals even ended up saving money (more or less a thousand dollars) every month using a housing loan refi to one of those low-rate options.
Now, if an individual has been watching interest rates pretty closely, they know they’ve inched a lot higher over the last couple of months. But unfortunately, they are still in the red line or closer to it, which means they can still land lower IRs. Their best bet is to schedule free mortgage refinansiering reviews with salary-based housing loan consultants and see how much they can save with cash-out remortgages.
Maintain a person’s savings
Experts and professionals recommend having three to six months of living expenses saved as an emergency fund. With this in mind, the last thing people want to do is spend all the savings on property improvements. Using some of the home equity in cash-out refinances provides individuals the freedom to keep their emergency funds, at the same time increasing their home’s value.
No restrictions on how individuals can use these funds
Say an individual receives $20,000 from their cash-out refi. They look up property improvements with a good return on investment and decide on fiberglass doors for $10,000. But what should the homeowner do with the remaining amount?
Another advantage of this refi is the flexibility people have with the funds. Homeowners do not need to worry about restrictions, making it an excellent idea to find out how they will use this fund in advance. They might consider using residual funds to pay off high-interest loans or debts, as well as get another savings account for unplanned home repairs.
Disadvantages of refi for house improvements
Homeowners will shoulder the closing cost
Remember when you first bought your property and were responsible for the closing cost? Unfortunately, since property owners will be taking out a new debenture, they will be paying these costs again. Take a couple of minutes to find out the break-even points and make sure you have two to five percent of the debenture amount in hand.
The risk of foreclosure is pretty high
Choosing to get cash-out refi requires higher monthly amortizations. People need to be honest with themselves and any co-signer on the debenture: can they handle it? If the individual calculates the numbers and they are uneasy about the additional cost, they might want to hold off the remortgaging, so they do not end up losing their house.
Added value to the property is not guaranteed
Ultimately, improvements people make with the residual cash should benefit the homeowner and their family members. But who is to say whether strangers will appreciate updates the same way when they decide to sell? Not every improvement provides the best return on investment, even if they assume it does.
Other ways to finance a house improvement project
Individuals are not limited to cash-out refinancing options when paying for house improvements. For instance, they can also take out home improvement debentures. It comes in unsecured and secured forms. Personal loans are another popular choice, despite their higher IRs.
Homeowners can also get a Federal Housing Administration 203K debenture. This home construction credit help individuals finance a property purchase and home improvements with a single loan. As with any other debenture scheme, homeowners will need to meet specific criteria and have eligible properties.
The last option worth considering is a Home Equity Line Of Credit or HELOC. This kind of credit works similarly to credit cards in the sense that people have revolving credit lines. The more people rely on a Home Equity Line Of Credit, the fewer funds or credit available. Always remember that the Home Equity Line Of Credit is different from a cash-out refi.