Mortgage and Refinance Options for Families Who Have Outgrown Their Homes

A growing family doesn’t necessarily need to start looking for a new, larger home; they may be able to grow their current home to meet their families needs with a renovation loan.

In many situations, it’s more affordable to improve the home you currently own than it is to purchase and move into a larger home. Staying put sounds nice, but you’re probably wondering how you might be able to afford a remodel? The good news is that at Summit Mortgage we have a number of options available that allow you to borrower money against your home to remodel your home and make it into one that meets your families needs!

What type of mortgage program is best for remodeling and how do they work? We’ll show you. We may even save you some money.

What Is a Cash-Out Refinance?

When you choose a cash-out refinance of your home mortgage, you’re essentially refinancing the current balance of your mortgage and borrowing money against the equity that is in your home. When the refinance is complete you will have an entirely new loan that will pay off your current mortgage and provide you cash to use to renovate your home (or make other major purchases or consolidate debt).

Now let’s apply some numbers to see how this all plays out.

Say you purchased your home with a mortgage for $200,000. You’ve also been making payments since moving in. While the bulk of those initial payments go to paying the loan’s interest, some portion goes toward the principal each month increasing your equity.  Let’s suppose you’ve built up $50,000 in equity through your payments. Now, let’s factor in the increase in your home’s value. For our example, we’ll claim the home has a current market appraised value of $250,000.

The first thing you’ll need to do is pay off the existing mortgage. This would have $150,000 remaining ($200,000 original loan minus $50,000 in equity built through payments). Doing so means you’d have $100,000 in equity in the home; you won’t be able to use all of the equity but many loan programs will allow you to borrow up to 80% loan-to-value with a cash-out refinance. This means you would have a appraised value of $250,000, a loan balance to pay off of $150,000 and to meet the requirements of the loan you could get cash out of $50,000 minus applicable closing costs.

Now take a turn and run your own numbers using this handy loan calculator.

If you don’t need to borrow the full amount available you don’t have to – amount is up to you. On the flip side if this isn’t enough to get the renovations done that you are needing then there are other routes that may allow you to qualify for your loan based on the post-renovation value of the home versus the current market value. These are called renovation loans, for more details on those, we advise you to work with a personal loan officer.

Also know this: a cash-out refinance of your home loan is not the only way to fund a remodel using equity in your home.

Using a Rate-Term Refinance to Fund a Remodel

With a cash-out refinance program, you are tapping into the equity you have built in your home while a rate-term refinance simply adjusts the terms of your current loan without borrowing more money against it.

The idea here is to lower your monthly mortgage payments by adjusting the interest rate or term (length) of your loan. This would be a longer process to pull together the funds needed for remodeling as you would use the money you save each month to put toward upgrades, additions or to save up over time for renovations.

Again, we encourage you to reach out to a local loan officer to find out what interest rates, and loan terms are available to you to find out how much you could potentially save each month if you were to refinance. A good rule of thumb to help you decide if a rate-term refinance makes sense is to ask the question is the difference between your old rate and the new rate a half percent or more. If looking to adjust the term, consider how much of a monthly impact is worth stretching out the time you have to pay on the loan?

What About Using a Home Equity Loan or Line of Credit for a Remodel?

You can use a home equity loan or line of credit (HELOC) for a remodel, but like the refinances outlined above, it will also be based on the current value of the home.

Why would you choose a home equity over a refinance?

In the current rate environment, many people secured low interest rates on their mortgages a few years ago and current interest rates are much higher so it may not be advisable to refinance the primary mortgage out of that low rate. Utilizing a home equity leaves your primary mortgage terms alone and places a second lien on your home with it’s own terms. One things to consider when it comes to home equity loans or lines of credit are that they typically have higher interest rates since they are second lien position, which is a higher risk to the lender however if you are borrowing an amount that is much smaller than the first lien then it may make sense to have that smaller amount at a higher rate while having the larger balance of the primary mortgage at the lower rate.

Do any loan programs allow me to use post-renovation value of the home?

Summit Mortgage has a wide array of renovation loan options that allow you to purchase a home or refinance your current home and wrap in the costs of renovations into the loan. Home Improvement or Renovation loans  are a very unique product so it is best to find a loan officer who can help walk you through the process. This program is meant for people who are looking to hire a professional to do the work and understand that the lender will oversee the distribution of funds to the contractor. If you are looking to do a lot of the work yourself, then the rate-term, cash-out or home equity loan or line of credit options are a better fit.

Refinancing With a Personal Loan Officer Helps a Growing Family Achieve Their Larger Home Needs

As a family grows, so do their needs: more bedrooms, more bathrooms, more kitchen cabinets and sometimes, just more space to spread out. There are a lot of ways to create more space for your family without having to relocate to a new home by renovating or remodeling your current home. When you work with a personal loan officer, they will get to know you and understand your situation, needs, and aspirations; they can guide you to the best mortgage options that will meet your families needs. Before you know it, you’ll have the money you need to create the home your growing family wants.

Want to get started now? Complete our Quick Start Form and we’ll connect you with a loan officer that matches your specific needs. They’ll provide a free consultation and guide you through every step of the loan application process.