Are you planning a home improvement project? Chances are you’ve contemplated how to pay for it. Consider ways to leverage your home’s equity rather than maxing out credit cards, liquidating savings or investment accounts, or settling for your remodeler’s short-term consumer financing offers.
Cash-Out Refinance. This may be a strategic way to pay for home improvements, depending on the equity in your home. If a first-lien mortgage already exists, you must pay it off with your new loan. You may only borrow against your home’s current (as-is) value and you will be required to preserve some of your home’s equity. Conventional and FHA mortgages allow you to finance up to 80% of your home’s value using a cash-out refinance. VA allows you to finance up to 90% of your home’s value using a refinance option that allows cash in hand at closing. Alternative options may be available using nontraditional (non-QM) loans. In addition to making home improvements, the proceeds of your new loan may also be used for debt consolidation or other purposes.
Home Equity Line of Credit (HELOC). You might explore the versatility of a HELOC (pronounced HEE-lock). A HELOC is a line of credit extended by using equity in your home as collateral. You can use loan proceeds for home improvements, debt consolidation or other purposes. If you have an existing first-lien mortgage, you can leave it in place and take out a HELOC as a second mortgage against your property. This is an attractive option for those with low interest rates on their first mortgages, but it comes with limitations. As with cash-out refinances, you may only borrow against your home’s current (as-is) value. Unlike other mortgages, you can pay off or pay down your HELOC and reuse it without applying for a new loan. Loan terms vary widely from lender to lender, and some lenders will allow you to finance up to 100% of your home’s value. During the draw period, your monthly payments are based on only the interest accrued, making this loan a good fit for those with the self-discipline to pay down the principal balance without being prompted to do so through monthly billing.
Renovation Mortgage. Most homeowners do not know renovation mortgages exist, allowing them to refinance their existing mortgage and include additional costs for home improvements. Before you execute another strategy, these loans are worth a look. Various renovation mortgages are available: conventional, FHA, USDA, VA, and portfolio programs. The proceeds of these loans may only be used to renovate your home. You select a qualified contractor who provides a bid detailing the scope of work, which is then given to the appraiser. The appraiser uses your contractor’s bid to estimate what your home will be worth after the renovation has been completed, allowing you to borrow against the future improved value of your home. Unlike a cash-out refinance, you are not limited to borrowing up to only 80% of your home’s value. With these flexibilities, you can borrow more, stretching your renovation budget.
Leveraging your home’s equity to finance improvements has its advantages. Interest paid on mortgages may be tax deductible. Since the costs are amortized over a sizable time period, absorbing the costs for home improvements becomes more affordable. Often, mortgages provide lower interest rates and overall costs than alternative financing methods such as credit cards or consumer financing.
Programs, rates, terms and conditions are subject to change without notice. Not all borrowers will qualify. Not all products are available in all states. Diamond Residential Mortgage Corporation, 582 Oakwood Ave., Lake Forest, IL 60045. 847-244-9301. NMLS# 186805. For licensing information, click here. Diamond Residential Mortgage Corporation is not affiliated with or acting on behalf of FHA, VA, USDA, or any governmental body or agency. Equal Housing Opportunity.
