Even the smallest home renovations can cost a pretty penny. Some people are lucky enough to have this money saved, but others are not. And even if you do have this money in your savings, is this the best way to pay for a home remodel?
There is no one-size-fits-all solution when it comes to paying for home improvements. Some people put these expenses on a credit card, while others take out a home renovation loan. Another popular option is to do a cash-out refinance. This is especially popular right now thanks to all-time low interest rates in California.
Let’s learn more about doing a cash-out refinance for a remodeling project and the benefits to expect.
What is a Cash-Out Refinance?
A cash-out refi allows you to refinance your mortgage for more than what you owe. You can use this money for any home remodeling project you choose. If you have enough equity in your home, you may be able to renovate several rooms in the home.
Here’s how the process works. Let’s say you purchased your home for $500,000 and believe it’s now worth $600,000. After living in your home, you’ve paid down your mortgage to $475,000. To determine how much equity you have, simply subtract your mortgage balance from your home value.
Using this example, your equity is $125,000. Now, you can’t take out all this money because you need to leave room to cover refinancing costs. But most lenders will allow you to take out 80%. You’ll have to pay back this money as part of your mortgage balance but at a low interest rate.
Qualifying for a Cash-Out Refi in Los Angeles
In most cases, you’ll need a credit score of 620 or higher to qualify for a cash-out refinance. You’ll also need to have a certain amount of equity in your home. Even if you have some equity, it may not be enough to cover your loan and the 15% to 20% in equity you’ll need to leave.
Debt-to-income ratio is another consideration that the banks look at. DTI is calculated by combining your monthly debt and dividing it by your gross monthly income. Most lenders won’t do a cash-out refi unless you have a debt-to-income ratio of 50% or less.
Benefits of a Cash-Out Refinance for Home Improvement Projects
There are a handful of benefits to expect by doing a cash-out refinance for a home remodel in Los Angeles. These include:
- Low-cost home improvements. If you don’t have the money on hand, refinancing allows you to borrow money all at once so you don’t have to take this out of your budget.
- Better loan options. When you refinance, you’re essentially rebuying your home. You can get a better loan than you had before.
- Boost property value. Improvements add value to your home. This will help you sell your home faster and for more money.
- One payment. Instead of taking out a loan or credit card with new payments, refinancing lets you maintain a single mortgage payment.
- Flexible options. The cash you get from refinancing can be used for anything. If you have money left over from your home renovation, you can use it for something else.
Start Your Home Improvement Project Today
Now that you know how a cash-out refi works, you can determine if this is the best way to pay for your home renovation. When you’re ready to start your project, contact Kavin Construction. We’ll be happy to sit with you, listen to your vision and put together a plan for how things will look. All estimates are honest and upfront. Start your home improvement project in Los Angeles today!