Are you looking for ways to finance your home remodeling project? With the real estate market booming, home values increasing, and record-low interest rates, now is a great time to invest in your home. If you’ve spent any time watching your local housing market, you may have noticed how competitive home buying is. Buyers are purchasing houses at tens of thousands of dollars above the asking price. Many Northern Virginians are deciding to remodel rather than buy new, and they’re getting creative with financing.
Benefits of Cash-Out Refinancing to Pay for Your Home Remodeling Project
Chances are that your equity has increased dramatically in the last few years. Refinancing and pulling cash-out may be an excellent way to finance your home remodeling project, transform your home according to your dreams, and improve your quality of life.
Home equity increases in three ways:
- Appreciation: Real Estate property value appreciates when there is more demand than supply, as is currently the situation, often called a “Bull Market.”
- Principal Payments: With each mortgage payment you make, part of it goes to pay down the principal value of what you owe the bank, and the other portion goes to pay the interest.
- Improvements: When you improve your house, you not only get to enjoy it for as long as you live there—you are also increasing its value.
Tapping into that home equity, you can do a cash-out refinance, which is a new mortgage loan that pays off your old loan and gives you cash at closing. Today’s lower interest rates provide an opportunity to lock in lower-cost borrowing, so that less of your monthly payment goes toward interest, and more goes toward paying down the principle, thereby building equity even faster.
Interest rates are so low right now, that it’s possible that a cash-out refinancing may hardly raise (or could possibly even lower) your monthly payments if the length of the loan is extended.
For example; Say you owe $400,000 at 3.5%, with 20 years left on your term, and plenty of equity available. Your monthly payments are $2,319. You might choose to borrow $200,000 of equity, to turn your house into that of your dreams, by refinancing a total of $600,000 at 2.5% for 30 years. Your payments would hardly change at $2,370.
A hidden benefit of refinancing at a lower rate is that less of your payment goes toward interest each month, and MORE goes to paying off principal, thereby increasing your build-up of equity.
A powerful benefit of professionally remodeling your home, besides the sheer pleasure you’ll derive, is that it is worth more; it’s an investment that you can enjoy! If you later choose to sell, it likely will bring more money and sell faster.
Another creative financing option is a home equity line of credit (HELOC). Your lender will approve you to borrow up to a certain limit, based on how much equity you have in your property. You can pull from this line of credit as needed to fund your home remodeling project, and you only pay for what you’ve borrowed.
Advantages of HELOCs are flexibility and accessibility—you can use as much or as little money as you need and only pay back what you use. Additionally, HELOC interest rates are usually lower than those of other personal loans.
And finally, a HELOC can be used temporarily for a home remodel, and then both the principle and HELOC can be refinanced into a single lower interest rate 1st mortgage—after the remodel is complete.
Some homeowners are in the enviable position of being able to finance their home remodeling using savings, investments, or an inheritance; by implementing a HELOC mentioned above; or by a combination of any of these sources. However, there is another often-overlooked opportunity—once the upgrades are finished, the house will appraise for more money and a larger loan may be obtained after the remodel than would be available before. This loan can be used to:
- Replenish savings or,
- Re-invest at a higher rate than the cost of the refinance, and take advantage of the spread, so that your home upgrade costs are abated, or even covered entirely, all while enjoying higher-quality home life.
Many of our clients in Northern Virginia are undertaking large-scale renovation projects, such as whole house remodeling, major interior structural modifications, large-scale additions, master suites, and kitchen remodels. According to the Leading Indicator of Remodeling Activity, homeowners are anticipated to spend about 4.8% more in the first quarter of 2022 than in the same period of 2021.
Investing in your home is important whether you’re looking to enhance your quality of life, or planning to sell your house in the next few years. Thinking creatively about your home equity can be a smart way to finance your home remodeling projects, especially while interest rates are historically low.
Are you ready to improve your quality of life and home value? If, so contact us today (703-255-9861) and we’ll help turn your remodeling and addition dreams into reality!