Finding cash for your big home remodeling plan
3. Refinance your existing mortgage
Home values in some real estate markets have
doubled during the past few years, inspiring
homeowners to take on big renovations. Because
mortgages are paid over 15, 30 and in some
cases 40 years, monthly payments are spread
over a much longer period and are thus lower
than a shorter-term HELOC or a home equity
loan. And since your home is used as collateral,
interest rates are typically some of the lowest
you can find.
Lower interest rates and lower
monthly payments might make a larger project
possible, but they also mean you will be paying
interest longer and thus the financing will
cost you more in the long run. The biggest
danger with a refinance is when real estate
values fall. If you borrowed against the full
value of your home and prices fall in your
area, you may end up with a more expensive
loan than your home is worth.
Ferrara advises his clients
against frivolously refinancing. "I am
typically not a fan of pulling equity out
of your house unless there is a darn good
reason," he says. "Refinancing should
not be a way to buy a boat or a big screen
TV, but if you remodel and add value to your
house, then you are increasing your net worth.
People get wealthy by increasing their net
worth, not their paycheck."
4. A construction loan can be a short-term fix
If you donít have enough equity in your home
to cover a renovation, a construction loan
may be a good bridge. With a construction
loan, you tell the lender what work you plan
to do on the house and they decide how much
that might increase the value of their house.
Based on that increase, the lender approves
the money to get it done. Construction loans
are meant as short-term options and only last
as long as the work on your home is ongoing.
After construction is over, you must refinance
with a home equity loan, a HELOC or a new
Construction loans offer variable
interest rates. If rates go up, so do payments.
You, the bank and your contractor agree to
a schedule that the bank will use to issue
payments, either directly to you or your contractor.
Construction loans also offer an added level
of protection for homeowners because banks
typically require several steps to protect
their interests. "A construction loan
is a perfectly fine idea and, in fact, if
you are doing a major remodel, the good news
is the bank will require a release of liens
from subcontractors and will protect you from
other common traps before they issue the final
payment to your builder," Ferrara says.
Because they aren't typically backed by substantial
equity, construction loans do carry higher
interest rates. On the bright side, some construction
loans can automatically convert to a longer-term
loan, meaning you only have to pay closing