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Remodeling? A Cash-Out Refinance Could Help

July 7th, 2014 9:20 AM by Jackie A. Graves, President

Stacks of One Hundred Dollar Bills with Small House.

In today’s recovering housing market, many homeowners have decided to wait a while before upgrading to a new home. In some cases, consumers may opt to remain in the same home until retirement, with a few simple changes making a home enjoyable for many years to come. Those changes require funds, though, and with so many homeowners still strapped for cash, those funds simply don’t exist.

 

With interest rates still low, cash-out refinancing has become a viable option for some homeowners. Borrowers get a better interest rate while also securing extra cash to spend however they want. Some consumers choose to put the money toward a child’s college education or a nice vacation, while others put that money to work on improving the very home they just refinanced.

Cash-Out Refinancing vs. Home Equity Loan

For homeowners, two types of loans can help generate the money necessary to pay for home improvements. The first is a cash-out refinance, which requires a redo of the original loan, complete with a new interest rate and new terms. The homeowner’s mortgage starts fresh, so if he’d paid seven years on a thirty-year loan, he would find himself at year one on a new loan after completion of the paperwork. The additional amount handed to the homeowner after closing will be part of the new home loan.

Another option, a home equity loan, leaves the homeowner’s original mortgage intact, with the new loan existing alongside the original loan. Also called a home equity line of credit, this funding option will be put into an account that the homeowner may then draw from on an as-needed basis. Following a set draw period, generally of ten years, the homeowner must begin repaying the principal and interest and the funds are no longer available for withdrawal.

Good Idea?

Since a cash-out refinance will be part of a homeowner’s monthly mortgage payment for many years to come, the commitment should be worth it. In some instances, that extra cash for a remodeling project could result in an increase in the home’s value once the homeowner decides to put it on the market. In that case, the extra money will be quickly recouped, making the extra refinance well worth it.

Before making the decision, homeowners should crunch the numbers to determine exactly how much that extra ten or twenty thousand dollars will cost over the years. This includes closing costs, which can add hundreds to thousands of dollars to the overall expense of getting extra cash. In some cases, a home equity loan may be a better option, depending on the length of time the homeowner plans to payon the house.

However a homeowner decides to procure the funds necessary for a home remodeling project, he should balance the costs of interest and closing costs against the benefits that will come from the work. Often an increase in the home’s value coupled with another decade or more in the house before selling will make the decision a good one financially in the long run.

By Courtney Watson – To view the original article click here

Posted in:General
Posted by Jackie A. Graves, President on July 7th, 2014 9:20 AM

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