Refinancing for Home Remodeling: Tips and Insights

Your house may have been perfect when you bought it, or you may have known right away that there were things you wanted to change. Regardless, at some point, you are most likely going to want to do a major remodel. Unfortunately, remodels are expensive, often costing tens of thousands of dollars or more. (The good news is that a good remodel can increase the value of your property, so you'll have more equity and make a greater profit when you sell.)

Here are some ways to finance that major remodel you're itching to do.

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Refinance Your Mortgage

People often refinance their homes to reduce their monthly mortgage payment by locking in a lower interest rate. But did you know that you can actually withdraw some of your equity when you're refinancing your mortgage? This is known as a cash-out refinance because you're taking out some of your equity as cash. The amount you withdraw is added to the balance of your mortgage. Any change to your monthly mortgage payment depends on the terms of your new mortgage, including the new balance, interest rate, and length of the loan.

You can use the cash you take out of the equity in any way you wish, which makes it a great option to pay for your remodel. The interest you pay on your mortgage is usually tax-deductible.

Home Equity Loan

A home equity loan is sometimes called a second mortgage and is similar to a cash-out refinance, in the sense that you're using the equity in your home to pay for the remodel. With a home equity loan, the interest rate will probably be higher than the rate on your mortgage, but you won't have to go to the trouble of refinancing. (And the interest rate will likely be lower than the interest rate of other types of loans with a different form of collateral.)

As with a cash-out refinance, you will receive a lump sum that you can use to pay for your remodel. The interest paid on a home equity loan is deductible if the loan meets certain criteria, including that it was less than $100,000 if married filed jointly, and less than the fair market value of your home.

HELOC, or Home Equity Line of Credit

Like a refinanced mortgage or home equity loan, a home equity line of credit, or HELOC, uses the equity in your house to pay for a remodel. However, with a HELOC, instead of lending you a large lump sum, the lender gives you a maximum amount that you can borrow. You can draw against that limit as you need the money to pay for expenses, and you pay interest only on the amount that you've actually borrowed.

A HELOC may be especially helpful if you know you will be making periodic payments on your remodel, such as to subcontractors, or for supplies if you are doing the work yourself. Because you only pay interest on the amount borrowed, you may be able to save money on interest, compared to a refinance or home equity loan. The interest paid on a HELOC is deductible if it meets the same criteria as required by a home equity loan.