After a major renovation, the value of your home will have changed. You may be wondering if it’s a good idea to refinance. Refinancing a mortgage after home renovations can be beneficial under the right circumstances. It depends on your goals for refinancing to begin with. Here are a few possible goals and the factors to consider before refinancing.
Cash Out Refinance
If you financed your renovations with a personal loan, 401k loan, or some other lending source, refinancing may allow you to take a cash-out in order to pay back that loan. First, consider the new value of your home with completed renovations. Compare this to your loan balance to determine how much equity might be available. Keep in mind that there are costs associated with refinancing and lenders will only loan up to a certain percentage of the home’s value. Given these factors, do you have enough equity to repay that loan?
The second consideration is to compare interest rates. Most personal loans have a much higher rate than home mortgages. How much will you save in interest by increasing your mortgage balance and paying off the personal loan? Some of that savings will be offset by the closing costs to refinance. Compare the figures to determine the most cost-saving approach.
Refinance to Remove PMI
Refinancing might also help you remove monthly PMI charges on your loan. Mot loans charge PMI when the loan balance is 80% or higher than the home’s value. The fact that you have renovated a home will increase its value. That figure compared to the mortgage balance may be sufficient to remove those PMI charges. Some loans allow you to remove PMI without formally refinancing. You simply need to order and pay for an appraisal to determine the home’s current market value. Check with your loan documents to see if PMI removal is an option or if refinancing is necessary.
You should also consider the potential difference in interest rates. Rates have risen over the last year. Refinancing a mortgage after home renovations may not make sense if you will be trading in a very low interest rate for a higher one,…and paying closing costs on top of that.
Additional Thoughts on Refinancing a Mortgage After Home Renovations
Mortgage decisions often involve multiple factors and considerations. When it comes to refinancing, the two most important are cost and interest rates. This covers your up-front and long-term expenses and potential savings. By looking at the big picture and making realistic calculations, you can make better decisions when it comes to financing your home.