So, you've been thinking about making home improvements but you lack the cash to do so? You feel that it's the right timing and you regret that you haven't saved for this situation? You don't need to despair. If you've been paying your mortgage installments and you have some equity available on your home, you can refinance your home loan and take some cash out of your home equity.
With a Cash out refinance home loan you can refinance your current mortgage for a higher loan amount than your outstanding debt and thus obtain extra cash for whatever purpose you desire. You can easily use the money to make home improvements and thus, you would be using as collateral for the loan the very same property that you're going to improve.
Cash Out Refinance Mortgages
Cash out refinance home loans are just like regular refinance home loans, only that you actually refinance for a higher loan amount than your outstanding mortgage making use of the equity you've built on your home. Thus, you get a fair extra amount to use for whatever purpose you can think of.
For example: Let's say you own a property worth $100,000 and you still have to pay a mortgage loan of $60,000. This implies that there is $40,000 worth of property that can be used as collateral. Though some lenders are willing to finance up to 100% of the property or even more, most of them will only lend up to 85%. Thus, in a common scenario you can request a refinance mortgage loan of $85,000, use $60,000 to repay the previous loan and keep $25,000 for other purposes.
Home Improvement Loans
When these loans are used for home improvements, they are actually raising the value of the property that is used as collateral for the loan. Thus, the lender is benefiting from the fact that the asset guaranteeing his money is more valuable and thus, the risk involved in the transaction lowers.
Some lenders will consider loans used for home improvements to be of a lower risk and thus will offer you special loan conditions, including lower interest rates, longer repayment programs and thus lower monthly payments. All this benefits can be easily obtained by just requesting a loan specially tailored for home improvements.
Usually the interest rate charged for these loans is a bit higher than a regular home loan. But this is true only under the same credit circumstances. If your credit score has improved since you requested your current home loan, chances are that you might get a lower interest rate and general better loan conditions by refinancing your home loan.
Thus, consider checking your credit report prior to applying to know where you stand and what you can expect by refinancing your current mortgage with a cash out refinance home loan. Also check that there are no prepayment penalty clauses in your previous home loan since this can increase the costs turning refinancing more onerous than you thought.