In the past several months, you probably have heard about how the pandemic brought down mortgage rates to astoundingly low levels. Suddenly, buying a house became affordable to more Americans. Many homeowners have also rushed to refinance their current mortgage and get a deal that will save them money in the long run.
If you are not planning to take advantage of the competitive mortgage rate, you might want to think twice about the decision. There is another way you can use the money you save from refinancing your home loan and that is to make improvements to your property.
Indeed, mortgage refinancing is not just for those who want to cut down their monthly obligations or make their mortgage term shorter. Those who dream of giving their home an extreme makeover will benefit from it, too.
Cashing Out to Pay for Home Improvement Projects
Low mortgage rates mean overall savings for the borrower. Depending on their loan, a borrower may save hundreds of dollars every month and thousands of dollars over time.
By refinancing, therefore, a homeowner can free up cash from their monthly expenses that you can use for renovations. Getting new wall-to-wall carpet or built-in cabinets would not strain your budget meant for other necessities such as food, utilities, your children’s education, holidays, etc.
But, what if the improvement project costs more? You, for example, want to get a deck installed in your backyard or turn your attic/basement into a guest room. You would need more than a few hundred dollars on hand to pay for these additions.
You would still gain incredible savings by taking out a bigger loan that has lower interest rates than your current mortgage. For example, if you still have $100,000 left to pay, you can refinance your mortgage but take out a larger loan. Request for $115,000 so that you can pay off the remaining balance in the original mortgage and then use the remainder for whatever home improvement that you want.
The process is called cash-out refinance. Nothing would change: you still will have to pay your mortgage every month. However, you will get extra money to be used for whatever reason. You can use it to pay off your current credit card bills which, typically, have high-interest rates. You can also take your family to another country on a vacation.
More importantly, you can use the excess to fund your renovation. You can get even more money from it if you make additions that will improve the resale value of your real estate property in case you want to sell in the future.
Why It May Not be a Good Idea
Cash-out refinancing is not for everyone. Refinancing your mortgage comes with fees that may make your monthly payments more expensive than you expect. It is pretty common for a lender to offer low mortgage rates but high fees. You may not be getting a good deal if you are paying exuberant closing fees on top of your monthly mortgage dues.
If your current mortgage is already low, you would not gain much from refinancing. In September, mortgage rates for 30-year loans dropped to 2.86%.
Moreover, because you have access to more money, you might be tempted to renovate more than necessary. Any cosmetic changes that will not increase property value nor overall improve your enjoyment of the house would be a waste.
An Additional Fee
Another factor that you should consider before pushing forward is the new “adverse fee” that Fannie Mae and Freddie Mac are imposing to lenders starting December. The fee, which was originally set to be implemented in September, is meant to recover the losses that the industry has and will likely continue to experience because of COVID-19.
The new fee could easily add several thousand dollars to your down payment. Although the mortgage rates are low, the cost of refinancing is going to be high.
Time to Decide
You still have time to think about refinancing to fund your home improvement project. Analysts predict that the low mortgage rates will continue up to 2021 as a long term consequence of the economic devastation that the pandemic has brought to the United States.
Not everyone would benefit from refinancing their mortgage. Some, despite additional fees, could see savings that will help fund home improvement projects or other necessities. However, many will not gain anything from it. It may even make their monthly expenses more expensive and, with additional fees imposed by lenders, it may be more financially harmful in the long run.
Give yourself time to think and weigh your options so that you can make a decision that will benefit you.