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Should I Refinance My Mortgage for Home Improvements?

Should I Refinance My Mortgage for Home Improvements?

Unfortunately, there is no one size fits all answer to the question. Each homeowners’ circumstances are different, with many variables involved. We have assembled some relevant information along with useful suggestions and options to consider in the decision-making process of whether refinancing is the right course of action for you or not.

How Refinancing Works

Most homeowners look to change their loan provider every three to four years to help them get the best interest rates available. A standard refinance loan is straightforward to do and takes less than a month to switch to your new provider. The lender will only want to give you a loan to the value of 80% of the property value, but you can ask for less if you have paid off more than 20% of your home loan. Lenders have different terms attached to their home loans so you should check what penalties you may incur by paying off your existing mortgage early, and these usually are higher on fixed-rate loans.

Benefits of Changing Loan Providers

The number one reason homeowners look to switch providers is to reduce their interest rate. Once you have owned your property for a few years and have been paying all your bills on time, your credit score will improve, which will make you eligible for lower rates. There is a lot of competition between lenders to gain customers, and so there are many great deals available if you shop around. Getting to grips with all the various aspects of refinancing can help you decide if that is the right move for your circumstances, along with seeing the best rates available. If your financial history has improved since you last took out a home loan, you will find that you can save money every month through lower rates.

Property Valuation

Every property owner expects theirs to increase in value year on year. Properties do generally rise in value, but this is not always the case when checking every few years, as housing markets can take a dive. Before a new lender refinances your home, they will want a current valuation of your property along with an inspection. If your home has risen in value, you can either take out a loan to cover the full 80% equity, or take enough to cover your previous mortgage, and for the improvements, you want to make. Perhaps the only downside to taking out a new home loan just before you make the improvements is that the property will increase in value afterward and you will be stuck with the existing mortgage for a few years. 

 Should I Refinance My Mortgage for Home Improvements?

Using Savings for Home Improvements

If you are in the lucky position of having savings that you can use to add an extension or make improvements, this may be a great option for you. You can use your existing savings now and then refinance after you complete the work on the property. Using this method will mean that your home will get a higher valuation before refinancing, giving you enough money to pay back your savings, pay off the existing loan and leave you with some cash in hand. Not everyone has savings to cover significant home improvements, but if you do, it could be your best option. The only downside to using savings is that you will leave your bank low on funds should an emergency crop up.

Getting an Equity Loan

An equity loan is a low-interest rate loan using the equity you currently have in the property. An equity loan is great if you are already on a reasonable interest rate with your home loan and just need a little money to complete your home improvements. The major downside to getting an equity loan is you will either have longer repayment terms or increased monthly repayments as they are just adding to your existing home loan. Many people who are near the end of paying off their home loan will get an equity loan to make improvements, have a holiday or buy a new car. These will be hard to get for those who have only had the property for a short time as there will not be much equity available in the property, if any.

The Choice is Yours

You need to consider the best option for you, with regards to refinancing for home improvements. Perhaps doing a DIY project which will be cheaper suits your needs better. Remember that any improvements you make may not directly affect the value of your property. Take the time to consider all available options before embarking into a new home loan.