Should You Refinance to Remodel Your Home?

Home RenovationHave you been dreaming of remodeling your cramped and outdated kitchen forever? The cost of even a small remodel can quickly reach five digits, and it isn’t uncommon for larger remodels, especially whole home remodels, to reach six or even seven digits in price. Most of us don’t have $10,000 just sitting around, much less $100,000 or $1,000,000. How are you going to find the money to get that kitchen of your dreams? The answer might literally be under your nose!

Using a Home Refinance to Pay for a Remodel

As of the writing of this article in 2016, we are at a home refinancing sweet spot. Interest rates continue to hover at record lows, while the housing market in most parts of the country steadily increases in value. If your home has increased in value since you’ve purchased it, and/or you’ve paid off a chunk of your mortgage over the years, you can use a refinance to extract that equity out of your home and apply it toward a remodel.

Let’s See How This Works

Jennifer purchased a home in San Diego in 2012 and took out a $450,000, 30-year fixed-rate loan with a 5.5% interest rate. Today, in 2016, her home is worth $500,000. She has faithfully been paying off her loan and now owes $430,000 on it. She decides to refinance with a $500,000 30-year fixed-rate loan at today’s lower interest rate of 3.8%.  She uses $430,000 of the $500,000 loan to pay off her existing mortgage, which leaves her with $70,000 of extra equity left over. She decides to use this money to pay for her home remodel. One drawback on Jennifer’s decision to refinance is that she has now re-set the clock on her mortgage loan and will be paying it off for 30 years. One bright side is that even though her refinance loan amount is greater than her original loan, her lower interest rate means that she is actually paying over $200 less on her mortgage each month ($2,330 vs $2,555).

Is Home Refinancing Right for You?

Refinancing your loan comes with some significant costs. You will need to pay to have your home appraised, and your refinance lender will also hit you with a wide array of fees and other costs. Overall, you may be looking at thousands of dollars in fees and costs, which you may choose to pay out of pocket or roll into the loan.

Also, taking equity out of your home to cover the cost of a remodel means that you will be paying for that remodel over 30 years with interest! Your home is an asset, and taking out the equity now means you won’t have those funds available if you should need them in the future. Yes, a remodel is likely to increase the value of your home, but they almost never pay for themselves entirely.

Before you pull the trigger on a home refinance, make sure you shop around for the very best deal and that you carefully review all the fees involved to make sure this is the right financial move for you. A remodel does allow you to put the money from a refinances right back into your home in a form that you can enjoy for the rest of the time you live there. Falling in love with your remodeled kitchen all over again each day might be worth the cost of the remodel!

Want to learn more about how to be savvy with your money? Check out our money article archives just for women.

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