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How to Pay for Home Improvements through Mortgage Refinance

Many homeowners are taking advantage of the current low mortgage interest rates to tap the equity in their homes and finance home improvements. These home improvement projects range from style updates to safety upgrades to improvements that increase the value of the property.

If you have built up significant equity in your home, you have options as to how you will tap that equity to finance your home improvement project. Generally, there are two types of financing that can allow you to finance home improvements by tapping the equity in your home, including:

  • Mortgage Refinancing

    When you refinance a home mortgage, you obtain a new mortgage that pays off your first mortgage. When mortgage refinancing for home improvements, some homeowners take out a mortgage for more than their current balance and pocket the difference (called cash-out refinancing). While cash-out refinancing does add to the cost of the home mortgage refinance loan, it may be worth it to use the money to finance a home improvement that significantly increases the value of your home.

  • Home Equity Loan

    Tapping equity with a home equity loan (sometimes called a “second mortgage”) involves taking out a new mortgage that does not affect the terms of your existing mortgage. This type of refinancing provides you with one lump sum that you can use to finance your home improvements. Refinancing your home mortgage with a home equity loan is a good option for homeowners whose existing mortgages feature low interest rates and good terms. In addition, home mortgage refinance loans are often tax-deductible and paid off in a shorter period of time than if you were to refinance your current mortgage.

The type of loan you choose should take into account your current loan’s rates, the size of the home improvement project you are considering and how much equity and cash you can spare. When you are calculating the cost of refinancing or taking out a second mortgage, be sure you factor in recording fees, appraisals, origination fees and discount points which are usually paid at closing.

Evaluate your Return on Investment

Before you commit to a home remodeling project, determine whether that particular home improvement will boost the value of your home enough to justify the costs of a home mortgage refinance loan. While mortgage refinancing for home improvements can be a savvy financial strategy because you are essentially using your home’s equity to make improvements that build more equity, you have to do your research to ensure that your specific home improvement will pay off in the long run.

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