If you want to renovate your property, you may want to consider refinancing your home first. In most cases, refinancing can allow you to change your home loan to better suit your needs –and if you want to spend less on your monthly repayments ready for when you improve your home in the future, this might be the ideal option for you.
Cash out refinancing
If you plan to refinance so that you can save cash on your loan (especially in the event that you want to use any additional funds for a home remodel), you might want to consider choosing the cash out refinancing option – which will generally allow you to turn your home’s equity into money.
Having extra cash to make home improvements is just one of the reasons why cash out refinancing has become quite popular. From paying for school fees to consolidating debt, there are plenty of benefits that can come with having an extra sum of money to enjoy – and cash out refinancing could provide you with just that.
Pros and cons of cash out refinance
Often, there are a number of ups and downs to consider when it comes to this type of refinance option. Some of the main benefits include:
- The payout of cash – generally, the main bonus of cash out refinance is the money you receive from your home’s equity
- A tax advantage – if you refinance, the interest you pay is often tax deductible. In addition, some of the closing costs may be tax deductible, too
- Lower costs – in most cases, refinancing for a remodel can often be cheaper than putting the costs of the improvements on your credit card, which is likely to come with a higher interest rate
While there are often a number of advantages to getting cash from your home’s equity with a cash out refinance loan, there can sometimes be downsides to this kind of mortgage deal too, such as:
- A higher mortgage rate – in general, by choosing the cash out option, you’ll be increasing your mortgage rates, or you’d have to extend your loan term to keep the costs the same
- A loan that is worth more than the home – in some cases, if your mortgage increases by a lot, you could end up paying more on your home loan than the property is actually worth
- Additional fees – in some cases, you’ll have to pay quite a few fees for your mortgage refinance, and these will often have to either be paid in cash or rolled into the overall loan amount
- Changing your mortgage terms – while this isn’t always a bad thing, you may not want to change the length of your mortgage. The reality is that you might not have much of a choice but to pick a new loan term
Calculate your LTV ratio
If you have an LTV ratio (loan to value ratio) of more than 80%, you might be charged extra on your new mortgage – which is why taking the time to find out how much your LTV ratio is can often be a wise idea. Generally, all you have to do is work out the difference between your current home loan amount and your property’s value to determine your loan to value ratio.
Often, those with an LTV ratio of over 80% will have to pay private mortgage insurance (typically abbreviated to PMI) across the duration of the home loan.
Is cash out right for you?
While turning your home’s equity into cash can be useful for a number of reasons, it’s often worth considering your other options before applying for cash out refinancing.
For example, instead of going for a cash out refinance loan, you could instead opt for a home improvement loan with no equity. While refinance can often be a good idea, there are alternatives that (depending on your situation) might be better for your needs.