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There are several different ways to finance your major home renovations. For starters, you could opt for what is called cash-out mortgage refinancing. This is where you refinance your existing mortgage for more than what you currently owe. For example, if you owe $250,000 on your mortgage, you could refinance for $400,000. This would leave you with $150,000 to put toward renovations.
The amount of money you can access using this option depends on how much equity you have in the home – this is the difference between the value of your home and the amount you owe on your mortgage. Typically, the amount of money you can free up is positively correlated to how long you have owned your home. You will usually be able to refinance to about 80 percent of the home’s value. In the example above, your home would need to be worth $500,000 or more in today’s market.
This option is advantageous because it will carry a lower interest rate and you’re using an asset you already have in order to pay for your renovations. The other benefit is that you are leveraging the current value of the home to further increase its value through the renovations.
A second option is a home improvement loan. Making home improvements is one of the quickest ways to add to your home’s value, while also increasing your enjoyment of it.
Home improvement loans are ideal because lenders can customize your loan, including your repayment plan, with an affordable interest rate. This is based on the borrower demonstrating that they can repay the loan and that their home carries a value worth funding.
Another name for a home improvement loan is a renovation mortgage. With renovation mortgage financing, some of the funds will go toward paying for the home or the balance on your existing mortgage, and the rest can be allocated towards making improvements to your home. Sometimes lenders will add specific instructions to these loan agreements. For example, you may be required to have a construction company on-hand to immediately receive the funds from the bank – this is done to ensure that the funds are used for their intended purpose.
When applying for one of these loans or mortgages, it is ideal to have your renovations planned out and have contractors and materials ready to go upon approval. This demonstrates to the lender that you will be using the funds appropriately.
Lenders will examine your employment history to ensure that you have a steady income and present a low risk of defaulting on your loan. Your debt-to-income ratio will also be taken into account; this is the amount of debt you carry in relation to the income you make each month.