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How to Finance Home Improvements

Thinking of doing a somewhat major remodel? Perhaps adding another room? Maybe a kitchen do-over has been floating around in your head. If you’re thinking of making some changes to your home, you need to decide how you’re going to pay for them. Of course, your checking or savings account is probably the first option but then some home improvement projects might put quite a dent in a bank balance. That’s when it’s time to consider financing a project. Here are some options for you to consider.

First, if you’ve been thinking about refinancing your current mortgage, you might want to add a little extra to your loan and take some cash out. Of course, taking out some cash to pay for home improvements while refinancing is a secondary consideration, not a primary one. If you’re going to lower your rate or switch loan terms or refinance for any reason, then think about taking out some cash during the process. Yes, you’re going to add to your loan amount, but you’ll be financing your project with very low rates compared to other types of credit. Note however that a new first mortgage will have typical closing costs.

You have the option of simply taking out a personal loan but the rates for unsecured personal loans are going to be higher compared to a secured loan like your mortgage. Unsecured loans are a greater risk to lenders as there is no collateral on which to place a lien, such an automobile or mortgage.

Next, you can take out a home improvement loan in the form of a second lien. Depending upon the size of the loan, you can simply take out an equity loan or a home equity line of credit (HELOC). An equity loan will be one single amount subordinating to the first lien. The funds are disbursed to you at the closing table and transferred to your bank account. All you need to do is pull the funds out when needed. Interest will begin to accrue the day the loan is issued.

With a HELOC, this loan type acts more like a checking account. It is indeed a line of credit that you can draw on at any time. You can also pay back some or all of the withdrawn amount whenever you want. Most HELOCs do ask for a minimum draw and establish when and how much payments are due. Interest is only applied upon withdrawn amounts, and not the credit line itself. With a HELOC, you can use the funds for any purpose, not just for a home improvement.

Finally, you can use any of these options along with paying for some of the improvements with cash. You might want to pay cash for part of a project and finance the rest. Lowering your loan amount when contributing cash to the project means lower monthly payments and less interest paid over the life of the loan. What’s your ideal solution among these choices?

It’s best that you speak with your loan officer and discuss your plans. The first option explored will likely be a cash-out refinance. If you’re open to lowering your rate or shortening the term of your loan, pulling out a little extra cash might be your better choice. The next consideration might be a standalone home improvement loan. These loans will have minimal closing costs but slightly higher rates. There is a small tradeoff, but your loan officer can explain the details.

Written by David Reed for Copyright © 2019 Realty Times All Rights Reserved. Reed is from Austin, Texas and is the author of The Real Estate Investor’s Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. A Senior Loan Officer and Mortgage Executive for more than 20 years, he has also appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show.