Josh Moody: Higher Home Values Can Make Cash Out Refinancing a Good Option For Home Renovations

We would like to renovate the kitchen in our home and have been considering our options. Can you explain a cash out refinance of our home and what we should consider as we make our decision?

The two primary types of refinances on a mortgage are a Rate/Term refinance and a Cash Out refinance.  A rate/term refinance is where you are only paying off a first mortgage.  This would be done if you want to take advantage of lower interest rates, possibly get rid of mortgage insurance, or change the term (number of years) on your loan.

A cash out refinance is when you pay off a first mortgage (if there is one) and borrow additional equity in the property to do anything else (renovations, pay off debt, etc).  A lender will typically allow a homeowner to go up to 80% of the appraised value of their home on this type of loan.  A cash out refinance is a very useful tool in taking advantage of equity built through loan repayment over time or appreciation of the property.

If your goal is to renovate your kitchen and you are considering financing options, a cash out refinance would be a great option for this for a couple of primary reasons.  First, due to current market conditions, home values are way up.  This means your home has much more value than it did just a couple of years ago, therefore it has more equity for you to be able to tap into.

Secondly, even though rates are higher than they have been in the last couple of years, you can still borrow at a reasonably low fixed rate. It would be a much lower rate than purchasing materials and appliances on a credit card, for example. As an added bonus, a renovation could possibly (although not always) increase the value of your property, so you get more “bang for your buck”.  So, in this scenario, a cash out refinance would certainly be a good option for this homeowner to explore.

If the equity is there, cash out refi loans are also a great way to pay off other high interest debt, or do a number of other things to help put your family into a better financial situation.  There are a lot of potential benefits to this particular loan product.

Josh Moody is with The Mortgage Center Powered By Hometown Lenders. He has almost 20 years experience in the mortgage business. You can submit a mortgage question to Josh for his weekly column by sending an email to [email protected]. Disclosure: The Mortgage Center/Hometown Lenders is also an advertiser in The Gardendale News.