It can be overwhelming for homeowners when planning to make renovations on their home. If you’re also working to refinance your mortgage at the same time, those feelings can multiply in no time, especially when it comes to Norwood Park homes for sale.
There are many variables involved in the renovation process. One of the more difficult things to figure out is the timing. That’s why real estate agent Jack Guest put together an insider’s guide on the topic. It should help answer any questions you may have about refinancing your mortgage and when you should do it.
Consider what type of renovations you plan to make
The first point you’ll want to consider is how many improvements you plan to make to your home. How extensive a project do you envision? This will help determine whether it is smarter to refinance before making upgrades or after. Consult with a local real estate agent and your lender to get a better understanding of what’s affordable given your current financial position.
Below are the major reasons why you should refinance before or after your project begins. Let’s start with the reasons why you should refinance first.
Reason to refinance first #1: Cash out refinancing
The main reason why homeowners would want to refinance their mortgage before renovating their property is to better fund the project from the start. The most common way to access those funds is to carry out a “cash-out refinance.”
This procedure allows you to use the equity you have in your home directly and convert it into cash. In most cases, you can negotiate with your lender about the amount of equity you can borrow.
Let’s say your lender permits you to borrow 75% of the market value of your home. If your home is valued at $1 million and you’ve paid off half, that would mean you could potentially cash out $250,000 for your renovations.
Once you close on that loan, your lender pays off your remaining mortgage of $500,000. Then, you’ll receive the cash-out amount and add it to the current balance on your mortgage. In the end, your new mortgage amount would be $750,000. This can be an effective way to access funds quickly and jumpstart your project from the ground up.
Reason to refinance first #2: Reduce your monthly payments
The second reason why it might be smart to refinance first is to lower your monthly mortgage payments. By taking out a rate and term refinance, you could get mortgage payments that are more affordable for you at the moment before starting renovations.
If you choose to refinance before making upgrades, your new mortgage plan may allow you to lower your interest rate too. This could be a helpful way to take some of the weight off your shoulders as you start your home improvement project.
However, it’s always good to remind yourself that your refinanced mortgage could be extended longer than your previous one. This will ultimately lead you to pay more in interest than you did originally. Speak with your lender to learn more about the details.
Now let’s move on to some of the reasons to begin renovations and then wait to refinance once you’re done.
Reason to renovate first #1: Boost the property value
Without a doubt, the number one reason that you should start renovating first is to raise the value of your home and the equity you have in it. In most cases, any well-done improvements will accomplish this. In consequence, you’ll have more equity in your home to work with later on.
Once you make those renovations, then you can return to your lender and receive a cash-out refinance that’s considerably more than what you would have gotten before. Let’s consider why waiting to refinance could be the better tactic for you to take.
As in the example above, let’s say your home is valued at $1m before renovations, and that you still owe $500k on the mortgage. If you decide to invest $50,000 in upgrades, you may raise the value of the property by $100,000 or more. That means you would receive a cash-out refinance of $325,000, or $75,000 more than before. That’s quite a difference.
Reason to renovate first #2: Fund more projects down the line
Another good reason to wait to refinance until after renovations is that you’ll have more cash in hand to fund further projects. In many cases, homeowners decide to continue making improvements as soon as their first project is complete. This strategy can be an effective one, especially if you live in a neighborhood with a competitive market or if you own luxury real estate.
You should consider what value your home will have once renovations are over. Meet with an appraiser to calculate just how much it will increase. Then, compare that amount to the balance on your current loan.
Refinancing is usually a costly procedure. You should take your time when deciding if it’s a good time to hold off on your upgrades or not, depending on your financial health. How much will you save in interest payments when you compare the two options? Speak with your realtor and discuss the pros and cons.
Requirements for cash-out refinancing
Keep in mind that you’ll need to meet the requirements for a cash-out refinance too. This usually means you’ll need to possess a good credit score above 615 or so. Additionally, you need to remember how much equity you have in your home before renovating. Lenders often require that you have at least 15% equity, but the percentage will vary from lender to lender.
Finally, you’ll need to meet the requirements when it comes to your debt-to-income ratio. Most lenders ask that you have a ratio of 50% at least. To determine your debt-to-income ratio, simply add up your debts every month and divide that figure by your income every month.
Meet with a local real estate agent today
It’s important to weigh the benefits and drawbacks of refinancing before you break ground on any renovations, especially if they’re going to be extensive. If you have any questions about this topic or if you would like to learn more about houses for sale in Norwood Park or condos for sale in Norwood Park, reach out today! Contact The House Guests Real Estate for more information.
