Mortgage and Refinance Options for Families Who Have Outgrown Their Homes
A growing family doesn’t necessarily need to start looking for a larger home. In fact, the best home option could be the one they are already living in, providing they can afford to make a few renovations.
In many situations, it’s more affordable to improve the home you currently own than it is to purchase and move into a larger home. Staying put sounds nice, but you’re probably wondering how you might be able to afford a remodel? The answer is likely to be by refinancing your current home mortgage.
What type of mortgage program is best for remodeling and how do they work? We’ll show you. We may even save you some money.
What Is a Cash-Out Refinance?
When you go with a cash-out refinance of your home mortgage, you’re basically buying your home all over again. Only this time, you’re buying it from yourself and you should be doing it with three major advantages.
- You have equity built up in the home
- The home’s value has increased
- Ideally, you’ll have a lower interest rate
Now let’s apply some numbers to see how this all plays out.
Say you purchased your home with a mortgage for $200,000. You’ve also been making payments since moving in. While the bulk of those initial payments go to paying the loan’s interest, some portion goes toward the principal each month increasing your equity. Let’s suppose you’ve built up $25,000 in equity through your payments. Now, let’s factor in the increase in your home’s value. For our example, we’ll claim the home has a current market value of $230,000.
That’s the background. Now for the refinance.
You refinance the home at the full $230,000 market valuation. The first thing you’ll need to do is pay off the existing mortgage. This would have $175,000 remaining ($200,000 original loan minus $25,000 in payments). Doing so means you’d have the ability to cash out $55,000 that you could use for renovations ($230,000 minus $175,000 that remained on the original mortgage).
Now take a turn and run your own numbers using this handy loan calculator.
Of course, you don’t have to refinance for the full market value. The amount is up to you, but you will not be able to refinance for more than the home’s value in a traditional cash-out refinance program. There are other loan programs that do allow you to borrow money against the projected home’s value after a remodel. For details on those, we advise you to work with a personal loan officer.
Also know this: a cash-out refinance of your home loan is not the only way to fund a remodel using refinancing.
Using a Straight-Up Refi to Fund a Remodel
With a cash-out refinance program, you are extracting every dollar you can in one lump sum to put toward a remodel. But, there are other ways for refinancing a home to remodel.
Instead of pulling cash out in bulk you can opt for a common rate and term refinance. The idea here is to move to a lower interest rate that, in turn, lowers your monthly mortgage payments. Then, you can use the money you save each month to put toward upgrades, additions or to save up over time for renovations.
How much can you save by refinancing your home loan to a lower interest rate? Quite a bit.
One again we will begin with a $200,000 mortgage. Additionally, we’ll say you purchased the home with a 30-year mortgage with a 5% interest rate. Making assumptions for taxes and primary mortgage insurance, your monthly payment would be approximately $1,425.
If you refinanced to a lower rate, say 3.8%, your monthly payments on a 30-year mortgage would be $1,300. That’s a $125.00 a month difference totaling $1,500 a year. That might be enough to build a wall, closet, add flooring or other upgrades needed to convert an existing space into a usable room for your growing family. Plus, by doing this, you haven’t increased your debt. Your mortgage remains exactly where it was when you purchased the home, only the interest rate has changed. Essentially, you are re-buying your same house for less money.
Again, we encourage you to try your own numbers and see what happens using this handy loan calculator.
Is a refi always a good idea? Not necessarily.
You need to work with a personal loan officer to make sure the change in rate is enough to warrant the paperwork and loan costs that go into a refinance. A good rule of thumb is the difference between your old rate and the new rate should be a half percentage point or more. Also, if you do need to make a significant remodel or addition, a small monthly saving won’t be enough to cover the cost.
What About Using a Home Equity Line of Credit for a Remodel?
You can use a home equity line of credit (HELOC) for a remodel, but it’s not our first choice unless you meet certain criteria.
When should you not refinance your mortgage and choose a HELOC?
If you plan to sell your home within the next five years, a HELOC is likely worth investigating with a personal loan offer. Why? In five years or less, you won’t be able to recoup the cost of a home loan refinance program. Also, if your primary mortgage interest rate is already low, it may not make sense to incur the cost of a full mortgage refinance. In these situations, a HELOC is your likely choice.
Among the challenges with a HELOC is the higher interest rate. While called a line of credit, a HELOC is essentially a second mortgage on top of your primary mortgage that is secured by your equity. A second mortgage always comes with less favorable rates making it a more expansive method to get money for a remodel.
Refinancing With a Personal Loan Officer Helps a Growing Family Achieve Their Larger Home Needs
As a family grows, its needs grow too. More bedrooms, more bathrooms, more kitchen cabinets and sometimes, just more space to spread out. There are a lot of ways to create more space for your family to live in by renovation or remodeling your current home. And the smart way to go about it is to fund your projects using a refinance program. When you work with a personal loan officer, they get to understand your situation, needs, and aspirations. They also let you know what the best mortgage rates and refinance rates are in 2020. Then they match it all with a refinance program that makes the best sense. Before you know it, you’ll have the money you need to create the home your growing family wants.