Financing Home Renovations

Posted by Richard on February 3, 2021

Home improvements and repairs are as inevitable as death and taxes – if you own a home, you’ll have to spend money to maintain and improve it to protect its value, especially if you hope to sell.
According to Time, Americans spent about $400 billion on home improvements and repairs in 2019.
Several types of home improvement financing are available, including home equity loans, a home equity line of credit (HELOC), or cash-out refinancing.
A home equity loan is a second loan on your house. It has a fixed-rate, lump-sum loan with monthly payments that remain the same for the duration of the loan term.
A HELOC is also a second loan and has a credit limit and revolving balance – good for homeowners who have several large payments due over time on big projects.
Cash-out refinancing retires your existing mortgage and creates a new, first mortgage on your home.
In most cases, you won’t be able to refinance your total home value. Depending on the type of loan you get, you will have to leave 15 percent to 20 percent in the home.
Cash-out refinancing can be useful since it gives you cash no extra loan or loan payment. Getting the loan depends on the amount of equity in your home and your present financial circumstances.
If you have a home worth $200,000 and you have $100,000 left to pay on your home, this leaves you with $100,000 equity. You can’t cash out all of that. Let’s say you have to leave 20 percent of the home value. That leaves you with $60,000 cash. That cash won’t be taxed. You will pay it back by paying your mortgage.
To qualify for cash-out refinancing, you must have a credit score of at least 620 and a debt-to-income ratio of at least 50 percent or lower.