Are you trying to find a reliable method to fund your remodel? Refinancing can help you get enough money to cover the costs of all your projects. You won’t have to rely on more personal loans or another mortgage to pay for the remodel that you want.
Overall, funding your remodel with a cash-out refinance is entirely possible. You’ll want to make sure you agree to the refinancing terms first. From there, you can get the cash you need to build your dream home! Here’s how it works.
What is a Cash-Out Refinance?
A cash-out refinance is a financial option you can use to access the equity you’ve built up in your home. To get the equity, a lender pays you cash for getting a larger mortgage. You have to borrow more from the new loan, but you get to keep the difference between what you owe on the mortgage.
A refinance isn’t at all like getting a second mortgage. You won’t have another monthly bill to pay since the refinanced mortgage replaces your old one.
You’ll need to understand how equity works to determine how much money you’ll need to get from refinancing your mortgage. If you want a remodel worth $25,000, and the current amount you owe on the home is $150,000, you’d refinance for $175,000.
However, you’d get to keep the difference of what you owed. In this case, you’d get to keep the $25,000 for the remodel that you want. Many people also use a cash-out refinance for emergencies. You can also refinance to get better mortgage terms!
How Much Will I Receive From a Cash-Out Refinance?
Most of the time, what you get from the cash-out will depend on the value of your home. You’ll have to have your home appraised by a professional first. Many lenders won’t allow you to cash out more than a certain amount of your home’s value.
For most lenders, that means that you can’t take out more than 80% of the home’s value. However, that usually is enough to perform some remodeling! Depending on your mortgage and financial situation, you may even qualify for more.
Know Your Equity First
You must know your equity of the home first. If you’re looking to get a high cash-out amount, you’ll need to have a good amount of equity built up already. You won’t get as much cashback from the refinance if you don’t.
You want to know that you can gain enough money from the equity to complete your remodel- or it likely won’t be worth going through refinancing to get it. You should ask for multiple quotes and estimates from local contractors first, so you have an idea of how much you’ll need to remodel.
It’s always good to compare how much you need to what you can get from refinancing before committing to new mortgage terms.
How Long Does Cash-Out Refinancing Take?
Cash-out refinancing is usually a reasonably fast way to get the funds you need for a remodel. You’ll apply to the lender with your W-2s, bank statements, or other pay stubs to show your DTI ratio. The lender will consider it for a few weeks then get back to you.
It doesn’t take too long for the lender to respond most of the time. They’ll guide you through the closing process if you’re approved. It shouldn’t take more than five days for you to receive a check after finishing the closing process.
Overall, the closing process can take 45 and 60 days, on average. That includes the appraisal, applying for the refinance, and the closing process. However, you can speed up the time by giving the lender all the required documents right away.
Common Cash-Out Refinancing Requirements
Most lenders will have specific financial requirements that you need to meet. Each lender can have its own, but most use a standard set of refinancing requirements that you’ll want to know. These usually include the following:
- A credit score of 620 or higher
- A DTI ratio less than 50%
- A sizable amount of equity in the home
You’ll also need to ensure that you have enough money saved for the closing costs. There are a few fees you’ll likely need to pay:
- Application fee
- Appraisal fee
- Attorney fees (dependent on the state you live in)
- Title search and insurance fees
- Closing costs (usually two to three percent of the loan)
That said, you may be able to defer some of these fees into your mortgage balance instead of paying them upfront. It depends on the lenders, so you’ll want to make sure you know what all of your options are.
What Are Average Remodel Costs?
The amount of money you’ll need for your remodel will vary greatly, depending on several factors. The kitchen and bathroom are usually the most expensive rooms to remodel in a home. The quality of the materials you buy will also significantly impact the price. Finally, where you live can even impact the final cost.
To remodel the entire house, it could cost anywhere between $15,000 and $200,000, which is a huge range! That’s why you must reach out to local contractors. Collect as many quotes as possible to find the best price for your budget.
It’s also a good idea to get slightly more out of the refinancing than you think you need. That way, if you run into unexpected costs during renovations, you’ll be able to take care of them without worry.
Check Your New Loan Terms
Your loan terms may change when you refinance. You need to make sure you understand what you’re signing on to! Your monthly payments and interest rates could change. Plus, you may have more or less time to pay back the loan.
Always look at the closing disclosure and talk with the lender if you have any questions- they should be happy to help you understand the new mortgage terms! Once you feel comfortable with the loan, you can move on to remodeling your home.
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