Can I Use a Refinance to Make Home Improvements?

A home is an investment. The more a homeowner puts in, the more they may get, either in equity or upon resale. Home improvements make financial and common sense by upgrading your residence's livability, as well as its value.

But the common question many encounter is how to pay for such projects —both large and small — when there's no real room for them in the budget. One option homeowners have is a mortgage refinance. Those with some existing equity built up in their property can use a refinance to cover home improvement expenditures.

Refinancing a mortgage could free up resources either through a lower premium or cash. However, there are some things homeowners understand when doing  research.

How does a refinance work?

Refinancing can net creditworthy homeowners better loan rates and terms if they've built their credit profile since first taking out a mortgage. Refinancing entails taking out a second mortgage to pay for the first, often at a lower interest rate and with a new term structure. The lower interest rate and spread-out payment schedule can lower the monthly payment. Converting from a fixed rate to an adjustable rate can generate further savings, which can create budget maneuverability.

What benefits does the cash-out refinance have?

The cash-out refinance is ideal for many pursuing home improvements. This type of refinance delivers an upfront cash amount that homeowners can immediately reinvest in their homes. For instance, after making payments for years, a homeowner who has a remaining principle of $200,000 on a $300,000 mortgage could replace the original loan. The refinance would tack on the cash value of an owner's choice, say $15,000, to total $215,000, but still reduce the monthly obligation through a lower interest rate and longer payoff term.

The clear advantage is using built-up equity to unlock liquidity that can help pay for home improvements. The cash-out refinance is a common tool used by homeowners for those exact plans.

How should I use refinance proceeds?

Deciding how to use that money is another process, as homeowners have to likely choose between vanity projects and more functional ones. For instance, in its 2019 "Cost vs. Value" report, Remodeling Magazine found a garage door replacement would cost $3,611, but contribute to a resale value of $3,520, meaning homeowners would recoup 97.5 percent of the cost. It's not the most attractive option, but a garage door remodel could be an easy and beneficial project.

Of course, each situation is different. Homeowners who aren't looking to sell or move anytime soon may be more tempted to upgrade through a master bedroom addition, a bathroom remodel or a patio. While the cost recouped is much lower for such projects, the larger investments mean larger resale values, as well as a potentially higher quality of life.

Have a question about how the refinancing process and whether you could gain from it? Contact your local Vectra Bank rep today to learn more.