Remodeling your home has multiple benefits; not only can you give your home a fresh new look but also reconfigure the layout to suit the needs of your growing family. A renovated house is more of a joy to live in and has a better market value in case you are inclined to sell it in the near future. It is important to keep in mind that the less your investment in the home renovation, the higher the return on investment will be. Most people are deterred by the amount of money required to carry out extensive remodeling, however by adopting a conservative approach and choosing the right kind of financing, it is quite possible to renovate your home without going bankrupt.
Cash-Out Mortgage Refinances
The cash-out mortgage is definitely one of the most popular methods of getting access to funds for refurbishing your home. This method envisages refinancing of the existing mortgage for an amount that is more than the current balance outstanding. The difference between the new loan and the old loan represents the amount that you have at your disposal to remodel your home. The cash-out refinancing method works the best if you have substantial equity in your home because then the amount of money you can get access to is more. However, you will need a good credit score to qualify for the loan. This method can be quite expensive unless you require a large amount of money because lenders are typically in the habit of adding a number of extra charges on top of the interest rate and that too on the entire balance of the loan. This effectively means that if you refinance a $300,000 with a $310,000 cash-out loan, you may end up spending $3,100 to borrow $10,000. Generally, lenders limit the amount of the loan to a maximum of 80% loan-to-value, which means that with your $300,000 home, you will be eligible to borrow only $240,000. The minimum credit score considered for cash-out loans hovers in the range of 620-640.
Home Equity Loans and HELOCs
Both home equity loans and lines of credit are mortgages that are secured by the property. Generally, they are referred to as second mortgages as typically, there is an existing mortgage against the property. The rate of interest on these loans tends to be higher than the rate applied on the first mortgage, as they are a riskier proposition for the lender. The combined loan-to-value is arrived at by adding the amount of the first mortgage to the amount of the second one and dividing the sum by the appraised value of the property.
A home equity loan carries a fixed rate of interest and normally secured by the property. Lenders usually follow a maximum of 80% loan-to-value policy. This means that the amount of cash that you will have for your home renovation is 80% of the value of your home less the amount of mortgage outstanding on the property. However, if you have excellent credit and a substantial amount of equity in your home, you could be eligible for an LTV that is as much as 90%, giving you more money for your home renovation.
As opposed to home equity loans, HELOCs are lines of credit that allow you to borrow whenever you like up to the limit sanctioned to you. Normally, HELOCs have two phases – a draw period and a repayment period. During the draw period, you can borrow whatever you need and are allowed to make just the minimum monthly payments of just the interest component. In the repayment phase, no more money can be drawn, and you start to pay off both the principal and the interest amount just like a home loan. The interest rate on HELOCs is variable unlike that on home loans. HELOCs typically tend to have heavier closing costs making the loans more expensive. In addition, the time for the approval is more than that on home loans.
Also called signature loans for the simple reason that they are made available by the lenders on the basis of a simple application form backed by your income details and credit score, personal loans are unsecured loans available without the need to provide any collateral security. The main advantage of personal loans is that they are very easy to obtain because the application procedure and documentation requirements are quite simple and typically, online lenders like Liberty lendingdo not charge any origination or setup costs. The limiting factors of personal loans are that the rates of interest tend to be on the higher side to compensate for the lack of collateral security. The rate of interest charged also depends on your credit score and if your credit is poor, you may need to pay really steep rates of interest that can take your cost of home renovation really high. The amount of funds that you can borrow as personal loans is however relatively small so if you are planning a really massive home remodeling project, it is unlikely to suffice. Failing to pay off the personal loan will damage your credit score; you can be chased by debt collectors and taken to court for the default.
According to https://www.creditcards.com, an increasing number of those renovating their homes, especially young homeowners between 25 and 34 years of age, are preferring to use their credit cards to finance home renovation than availing of home equity loans or personal loans. The main reason for this preference, according to the study, was that the homeowners felt that credit cards offered them a better deal with a zero percent or low-interest financing proposition. A whopping 74% of the respondents reported that their use of credit cards for home renovation was due to extended time at no or low interest. The card promotions were also quoted as the main reason for going in for purchases that would have otherwise been unaffordable. This drives home the point that unless you have access to a zero percent offer from a credit card issuer, it is better not to finance your home renovation project by rolling over credit card balances, as the typical rate of interest applicable is around 17%.
The method of financing your home renovation project depends on a number of factors like the amount involved, the surplus you can generate every month with your income to pay off the loan, and your credit score. If you have access to a zero-percent credit card offer and can pay the amount back within the promotional period, it is definitely the best option; however, if your credit score is good and you have substantial home equity, a home equity loan can be worthwhile.