3 Reasons You Shouldn’t Use a Cashout Refinance When Renovating

We’re going to be blunt here: refinancing can often be a dumb way to pay for your renovations. If you’re trying to lock in a significantly lower rate, you may be an exception, but for most homeowners, refinancing means throwing money away and getting less out of it. Let us explain. Here are 3 reasons why you shouldn’t use a Cashout Refinance when renovating.

1. You’ll Lose That Low Interest Rate

If you bought your home when interest rates were higher (like maybe back in 2000), then a refinance could be a good move. But today, most homeowners are giving up their low interest rates by refinancing, and paying for it big time. In 2018, the number of homeowners refinancing into a HIGHER rate was as high as 60%, according to Black Knight, Inc —a mortgage data and tech firm, which is the biggest share since the financial crisis. As you’ll see below, there are smarter ways to tap into your home equity that don’t require you to refinance into a higher rate

2. You’ll Have Much Less Borrowing Power

Typically, Cashout Refis only let you tap up to 80% of your home’s current value. That doesn’t sound too bad until you compare it to home equity loans which can go up to 90% of your home’s current value. What’s even better is that Renovation Home Equity Loans —like a RenoFi loan—allow you to borrow up to 90% of your home’s post-renovation value. Here’s what that comparison looks like:

For comparison’s sake, we’ll use 80% in both examples. If the current value of your home is 500K, 80% gives you $400K. But let’s say you have an outstanding mortgage balance of $350K. That means you can only borrow $50K for your renovations with a Cashout Refi. Say goodbye to the majority of your renovation wishlist.

Now, with a renovation home equity loan, if the future value of your home will be $750K after the renovation, 80% gives you $600K. After deducting the $350K, you can borrow up to $250K! (If math isn’t your thing, that’s 200K more.) Say goodbye to that kitchen from the 80’s!!

So to put it simply, if you’re going to tackle a renovation project, choose a financing option that doesn’t limit you from getting everything you really want.

3. You’ll Throw Away Money on Higher Rates & Closing Costs

If refinancing isn’t going to significantly lower your rate, then you’re really just tossing money out the window. Because even interest rates aside, you’ll pay closing costs for a Cashout Refinance as you would any refinance. These typically range from 2-5% of the mortgage, which for a $200K loan can be $5,000 - $12,500.

When you compare this to less than $900 in closing costs for Home Equity Loans—yes, you are reading that right—it’s pretty clear why we say you’re just throwing money away. By choosing a home equity loan over a refinance, you are saving thousands!

Before you choose a Cashout Refinance for your renovation project, be sure to do your homework as there are alternatives. You’ve already spent however many years paying into a loan, so don’t end up back at square one without any incentive—like a major reduction in your rate. With alternatives like a RenoFi loan, you don’t have to refinance your mortgage. To learn more about your options, contact RenoFi to discuss your renovation project today.

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