Unquestionably, refinancing a home loan is a frightening experience for most people. The thought of increasing the total amount of debt, the idea that monthly expenses will be increased, and the fact that one’s home is being put on the line in order to pay for something else are all very sobering thoughts. The decision is usually fraught with some consternation. But what about refinancing to fund home improvements? Is this a good way to renovate or upgrade your home. In most instances, yes.
One of the biggest advantages to taking out a mortgage in order to complete projects on the home is that the equity in the home actually increases. Assuming the renovations are not going to be well beyond the appraised value of like homes in the neighborhood, renovations actually increase the home’s appraised value. Particularly in situations where the insurance company feels that some issues do not meet current code. For example, a leaky roof or old wiring. Invariably, the insurer is going to demand that these items be fixed. By taking out a mortgage to complete these tasks, normally the value of the home will be increased.
Likewise, if rooms are being upgraded because they are sub-par, it is going to add to the house, which is a good reason to refinance. A kitchen with leaky faucets and broken linoleum on the floor and walls, is going to show better to appraisers, insurers, and the lender if it is overhauled. In addition, if the house is sold, it will be more appealing. Windows that are drafty are another area that lenders prefer to be fixed. By investing in the home with the refinancing, it shows that you take a vested interest in the house. Reverse mortgages can be used in similar ways.
Another situation which makes an ideal time to refinance to fund home improvements is when the local or federal governments offer tax incentives. Often, the government encourages residents to upgrade things in their homes in order to meet new standards, or to help the environment. For individuals that do not have the available cash on hand, refinancing can be an excellent solution.
But, there is one caution that home owners should heed. If the house is already mortgaged to its full value or close to it, there may be no value in refinancing to fund home improvements. Obviously if the insurer is forcing the issue, you need to complete the requirements to keep the insurance, but if you are gutting a room to make it nicer, you may have to wait until your financial situation is better.
Lastly, one piece of advice when refinancing a home loan. It is always a good idea to spend some money on the house that is mortgaged. Regardless of the reason one refinances, a portion of the proceeds, no matter how small, should be allocated to improving the house in some fashion.