Refinancing for Funding Home Improvements: Investing in Your Home

Making major home improvements requires planning for construction costs and paying for them. Refinancing your mortgage loan may provide funding for your projects if you have enough home equity. Here are some things to consider when planning your home improvements and shopping for financing.

Home Improvement Loans are Mortgages

Whether you refinance your existing mortgage or apply for a home equity loan or line of credit, all of these options are mortgages that can incur foreclosure. It's important to shop, compare, and evaluate multiple loan options for your home improvement project. Here are some tips for getting started:

• Get written estimates from contractors: You'll need to estimate project costs so you know how much to borrow. Although borrowing a little extra for "padding" in case of extra costs makes sense, avoid borrowing more than you reasonably expect to spend.
• Compare itemized refinance quotes: In order to compare loan and refinance mortgage quotes, you'll need to get quotes outlining loan amounts, interest rates, and lender charges. The combined amount of lender fees and mortgage interest rates is called the annual percentage rate or APR. Comparing each APR for identical loan amounts can help you find the least expensive loan option; the lower the APR, the less you're paying for a refinance mortgage or other loan.

Your Home in Rehab: Avoiding Complications

When providing proposals and quotes for their work, contractors may offer a "deal" on financing home repairs. These offers may carry higher rates than you'd typically pay for traditional home mortgages. Unscrupulous contractors have been known to team up with predatory lenders. Following these tips can help you find your best option for home repair financing:

• Avoid suspicious loan offers: Don't accept unsolicited offers of loans or refinancing
• Don't be pressured: Don't do business with anyone pressuring you to "sign immediately" or telling you that a loan quote is "good for today only."
• Request Good Faith Estimates (GFE): Take time to review each written loan offer and ask questions about any terms or conditions you don't understand. If your questions aren't answered to your satisfaction or a lender refuses to answer, find another lender.
• Verify references: Check with your local Better Business Bureau or your state Attorney General for complaints. Reputable mortgage lenders want your business, and want you to be comfortable dealing with them. Don't feel guilty about checking out potential mortgage lenders.

When planning for home improvements, getting refinance mortgage quotes can help you determine affordability and the feasibility of your plans; adjusting your renovations to meet your budget can help maximize your enjoyment of your home improvements without financial worries.

Home Improvement Projects and Refinancing: Pros and Cons

Refinancing requires borrowing enough to pay off your existing mortgage(s) and providing funds for your home improvements. Refinancing your mortgage can also provide these benefits:

• Lower your mortgage rate: Depending on your existing mortgage rate, you may be able to refinance to a lower mortgage rate.
• One mortgage, one payment: If "keeping it simple" is important, refinancing can help with getting the funds you need with one monthly mortgage payment.
• Convert from ARM to FRM: If you have an adjustable rate mortgage, refinancing to a fixed rate mortgage can stabilize your monthly P&I payments and may help with paying off your mortgage faster.

Research Before Refinancing and Renovating

Understanding which home improvements can add the most value to your home, knowing your home's current value, and researching local real estate market trends can help with planning your project and establishing a budget. Local real estate professionals can provide information specific to your neighborhood.

Drawbacks to refinancing include processing time and substantial closing costs. Consulting a financial advisor is useful for determining whether refinancing or a home equity loan is your best option for financing home improvements.

Deciding to take on additional mortgage debt for making home improvements can involve a fine line between investing in your home and risking over-improving it for your local market, or spending so much that you won't recoup your investment. Taking time to research and plan your home improvement project and home loan options is your first step toward successful home improvement plans.