A Little Known Alternative to Home Improvement Loans

Posted by Chris on August 14, 2014

Do you have a long list of repairs and home improvements that you want to make? Maybe you've been thinking about a new kitchen ever since the kids have moved out.

Most big home improvement projects get finance in one way or another. Usually people look at traditional financing options through a bank like standard home improvement loans. Some homeowners might consider a home equity loan or a second mortgage to get finance their dream renovation.

The truth is you don't always have to take out another loan. Instead, you could let the equity in your house pay for its own improvements. But we're not talking about home equity loans. This is a financing option a lot of homeowners forget about.

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Since mortgage rates are still low you can use a cash out refinance to fund home improvement projects. Using a cash out refinance can provide you with the cash you need at a lower interest rate compared to other financing options.

Understanding Home Equity and Cash Out Refinancing

Before deciding to do a cash out home loan refinance it's important to review the meaning of equity. If you purchased your home and it has increased in value from the amount that you paid for it, then you have equity in it.

Homes could gain equity for a variety of reasons. Some homes increase in value because of favorable market conditions. Maybe you've already made significant improvements to your home that have lead to a higher appraisal value. Just the act of paying your mortgage every month will lead to gaining equity.

Qualifying for a Cash Out Home Refinance

Lenders have requirements for any loan they give out. They want to ensure you're on solid financial footing and that your credit is healthy.

With a cash out refinance you usually need to have more than 20% equity in your home. Anything less than 20% and it would be difficult to execute a cash out option.

Any time you refinance you have to go through many of the same steps that you did when you acquired the original mortgage. For example, the bank is going to want to see proof of your income so that the entity knows you will be able to pay the loan back. You will also have get your credit pulled and get an appraisal on the house. The appraisal will determine how much it is worth now.

How Much Equity Can You Cash Out?

So how much money can you get by executing a cash out refinance on your home?

It really depends on internal rules established by the lender, the amount of equity you have and loan terms.

The appraisal will determine how much your house is worth now and the bank will allow you to take a certain amount of the difference.

For example, let's say that your house is now worth $350,000, and you originally purchased it for $270,000. You would cash out a certain percentage of $80,0000 as long as you qualify for the loan.

In most cases the bank will allow you to cash out an amount that will still keep the loan to value ratio at 80%. In the above example a LTV of 80% would be $280,000. That means you would be able to cash out approximately $10,000 of the $80,000 total equity without issue.

By choosing a cash out refinance you will have a new home loan with a new balance, new payment and most likely a new interest rate. Staying with the example above this means you would have a new loan balance of $280,000 and your payment would be based on that amount.

Since interest rates are still low you could still potentially save a lot of money by refinancing even if you cash out some equity. Don't overlook a cash out mortgage refinance when planning your next home renovation project. It might be a great way to finance the project at a great rate. Use our free cash out refinance calculator to see how much cash you could get.

Topics: Refinancing 101, Home Improvement