When you buy a new home, whether it’s brand new construction or a vintage Victorian, it’s going to become your “money pit” for as long as you own it. Houses take a lot of tough use, and it seems like something is always going wrong that needs to be replaced or fixed. Small repairs, like changing a lightbulb or giving a room a coat of paint, are minor annoyances that won’t cost you much in either time or money. Other improvements, such as a kitchen remodel or a basement upgrade, are going to take a bit more thought in order to pay the price tags. When the time comes that you need an extra chunk of change in order to finance improvements, what is the best way to afford it?
Any financial expert will tell you that one method of financing your project would be to increase the line of credit you already have on your home provided that your existing loan is at a low-interest rate. A maneuver like this shouldn’t cost you any closing costs as a refinance would do, so long as your lender is willing to help you do it. If you have a fixed-rate mortgage, this will allow you to retain the low-interest rate throughout the pay-back period. With an adjustable rate mortgage, however, you need to realize that your rate on the larger loan could go up sometime in the future.
Another tactic you could try is taking out a home equity loan in order to pay for the work that needs to be done. If you have enough equity in your home, this should give you enough money to do the remodeling as well as a substantial amount with which to pay off your initial mortgage. Although you shouldn’t expect to have to pay closing costs on this type of an action, you need to realize that your new interest rate could be substantially higher than the one you had on your first loan, because this new loan will have no connection with it.
A third financing option would be a cash-out refinancing to pay off your initial mortgage and give you the capital to proceed with the improvements you want to make. A lender who specializes in home equity loans might agree to refinance your existing mortgage; if not, you will need to refinance both your original mortgage and the new money you wish to borrow. By doing this, you could well be locking in exceptionally low-interest rates on both loans. Unfortunately, you could also lose the lower rate for your home equity line and pay higher closing costs on the first mortgage refinance.
It will take some figuring in order to decide which method of financing will be the most beneficial to you. Home improvements can be really expensive, but when you consider the increased pleasure you will have in your newly-remodeled home or the increased resale value you’ve created, the costs should be easily justified.