April 22, 2020
Maybe your home is overdue for an update. Maybe you need more room—another bathroom or half bath, a larger kitchen with space to cook and eat, or a first-floor master suite for privacy and accessibility. Maybe you need a new roof, exterior cladding, or an HVAC system to survive the Louisiana heat and humidity.
Renovations are key for not only adding value to a home but also maintaining its value. For many homeowners, the most significant hurdle is how to afford a renovation. Where do you find money to cover the renovation costs? If this sounds like you, home refinancing may offer a smart financial solution.
Home Refinancing Basics
Refinancing is basically a way of reevaluating your debt to see if you can alter the terms of the deal to your advantage with a new mortgage. For a home, that means revisiting the numbers associated with your mortgage loan:
- Current Value: Your home’s value rises—or falls—with the cost of comparable homes in your area, often called comps. A formal appraisal compares those comps to the critical elements of your house to determine your home’s current resale value.
- Outstanding Balance: The outstanding balance takes into account your current payoff amount on the primary mortgage as well as any unpaid balances associated with a home equity loan or home equity line of credit, often called a HEL or HELOC.
- Home Equity: Basically, home equity represents the difference between what you owe on your home versus your home’s current value.
- Loan Term and Interest Rate: These two conditions determine the length of your loan and the interest rate associated with it—a 30-year conventional fixed-rate mortgage versus a 5/1 adjustable-rate mortgage, for example.
If current interest rates are lower than your mortgage or, if you’ve been able to accumulate or grow the equity in your home, refinancing can offer several options to improve your bottom line.
Advantages of Refinancing a Home
Ultimately, the goal of refinancing is to put money back into your pocket, and that can happen a number of ways:
- Convert Equity Into Cash: If you hold more than 25% of your home’s appraised value in equity, you may be able to convert equity amounts beyond that 25% into cash.
- Lower Your Interest Rate: You can use the lower interest rate to lower your monthly payment, leaving more room in the monthly budget for out-of-pocket upgrades. Or, keep a similar monthly payment but use the lower interest rate for more buying power to pay for renovation costs. You can also lower the rate and keep similar monthly payments to pay down the balance more quickly, shortening the term to 15 or 20 years rather than 30.
- Change the Type of Mortgage: Refinancing can be particularly helpful if the type of mortgage you have no longer fits your plans. You may have initially opted for an adjustable-rate mortgage, but now that you intend to stay and make improvements, you may want to switch to a conventional loan or vice versa, allowing yourself to access additional funds in the process.
Overall, the idea is that the refinance will offer a new mortgage that is a better, more cost-effective match for your current lifestyle and future plans—including remodels and renovations.
Considerations for Refinancing a Home
Because refinancing results in a whole new mortgage with a potentially different lender, borrowers need to be especially vigilant of all the terms and conditions associated with it:
- Refinancing Costs and Fees: The closing costs, taxes and fees associated with a refinance can total several thousand dollars. Borrowers need to understand the length of time needed to recoup the total cost of refinancing under the new mortgage terms and conditions.
- Equity Ratios: While lenders typically require that borrowers maintain a certain percentage of equity relative to their home’s value, cashing out equity for personal expenditures like cars, medical expenses or student loans trades equity (an asset) for debt (a liability).
- HELs and HELOCs: Depending on the lengths of time and interest rates involved, using a home equity loan or home equity line of credit may prove a better short-term fit.
With all of these considerations, time is a major factor in defining whether refinancing your home is a good decision for you right now.
Refinancing With La Capitol Federal Credit Union
Finding the right refinancing option means working with a lender who understands who you are now as well as what you’re trying to achieve. At La Capitol Federal Credit Union, you’re a member—not just a number—and you’ll find experienced home mortgage specialists who are vested in getting you from where you are to where you want to be.
Let us show you your best options for home refinancing and ownership. Whether that’s how to afford a renovation or how to buy your first home, you can trust La Cap to have a financial solution to fit your current lifestyle and serve your future plans.
Visit Our Mortgage Refinance Center
Equal housing lender. NMLS #411413.