If the interest rate on your mortgage is higher than the current market rates, you might consider a cash-out refinance. You’ll refinance your existing mortgage for an amount that’s more than what you currently owe and receive the difference in cash.
A cash-out refinance is a good way to earn more favorable rates and terms on your loan. It’ll also give you the money you need to pay for your home improvements without taking out a separate loan.
But if current market rates are higher than your loan terms, a cash-out refinance might not be the best option for you. While you’ll be able to access your home equity, you’d have to pay more interest on your mortgage for the remainder of your loan term.
Home Equity Loans
A home equity loan is often referred to as a second mortgage. When you take out a loan, the funds are secured by the equity in your home. Home equity loans can be used for any purpose, including renovations or repairs.
Depending on your credit score and financial situation, you can take out a loan for up to 90% of your home’s equity. A home equity loan will come with interest rates that are higher than your mortgage but will still be more affordable than taking out an unsecured personal loan. Because the loan is a second mortgage, you’ll have two mortgage payments.
You can also deduct your mortgage interest on a second mortgage if the funds are used for home improvements. So this could help you save some extra money come tax season.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) allows you to borrow money using your home’s equity as collateral. Your lender will set a borrowing limit, and you can take as much money from the line as you need.
You can repay what you borrowed and borrow again during the draw period, which typically lasts 10 years. During the draw period, you only pay interest on the equity you use. You’re only required to pay something toward the principal once the draw period ends.
If you’re considering an extensive renovation and aren’t totally sure how much it will cost, a HELOC might be a good option for you. For example, if you decide to redo your kitchen, a contractor may quote you an initial estimate of $10,000. But as time goes on, you may run into issues with repairs or decide on different cabinetry. A $10,000 estimate could easily double in this case, and a HELOC’s flexibility allows you to borrow as needed.
Rocket Mortgage® does not currently offer HELOCs.