In today’s market, more and more people are refinancing their home loans to take advantage of lower interest rates, but remodeling may be a more common reason for refinancing nowadays. Whether looking to add additional square footage or luxuries like granite countertops, home remodels are being undertaken by many people looking to raise their home’s value.
Making the decision to refinance or remodel often comes down to the choice to either remodel then refinance or refinance to remodel. One of the first things you should address is whether you are selling or staying in your current home.
Personally, I would not choose to refinance if I was considering moving within six months of the refinance. Even if your home has a pink tile shower and floral wallpaper, refinancing with the intention to remodel for sale can be dangerous for someone without a strong financial foothold and may not ultimately yield a return. For someone with money to spare, remodeling to move is a viable option, but considering that improvements should be simple, those individuals should not have to refinance.
Now, for those planning to continue living in their present home, it is time to determine what type of loan would be in your best interests, an equity loan or a construction loan, and whether refinancing or remodeling comes first. An equity loan is based on the value your house appraises for and construction loans often use the expected value of your home after improvements are made. Because remodels frequently leave homeowners “upside down”, in the past it has made more sense to refinance before remodeling.
However, due to market conditions, lenders such as Fannie Mae and Freddie Mac have started offering refinance options that provide a lower interest rate and money for home improvements. These programs allow homeowners to refinance at current rates and borrow extra for remodeling.
For example, say someone whose mortgage is $140,000 is looking to build an addition to their house which will cost $80,000. Their home appraises for $160,000 so an equity loan will not cover the addition though after adding the extra space the home will be worth $240,000. Qualifying for these refinancing alternatives means this individual can refinance at a competitive rate while using the prospective value of your home to borrow enough to cover the addition.
While finding a program that offers a combined refinance and remodel loan may take time, it will mean not having to decide between refinancing and remodeling giving you the flexibility to refinance at a low rate and take care of the home improvements you have been dreaming about.