The cost to renovate an existing home varies, depending on the type of improvements made and the extent of renovations required. For most homeowners, the biggest concern is funding a remodel or renovation project. When it is a simple project, such as new flooring or replacing bathroom fixtures, the cost is typically small enough to pay cash or use small consumer finance vehicles, like credit cards. Most homeowners, however, have bigger projects to tackle. Bigger projects usually mean financing, with the two most common options being a straight renovation loan or refinancing an existing mortgage.

Important Factors to Think About

Consider, for example, a home equity loan compared to a no closing cost refinance .  Each option has benefits and drawbacks, depending on factors unique to each borrower. The importance of these factors depends largely on the borrower’s credit history, current mortgage terms, the interest rate on the current mortgage and the amount of equity available. Factors to consider include:
How much funding is needed?
What is the current market value of the home?
Will the improvements add market value to the home?
What are the terms and interest rates offered for each funding option?
What is the estimated monthly cost of each funding option?

Home Renovation Loans

A home equity loan provides the borrower with a lump sum dispersement, based on the difference between the current mortgage balance and the current assessed value of the home. With a home equity loan, the borrower receives loan proceeds and deposits the funds in his personal bank account. From there, the homeowner purchases supplies, pays contractors or otherwise completes renovations. Fixed monthly payments are made on the home equity loan, in addition to the borrower’s existing mortgage payment. Banks typically offer better interest rates on home equity loans due to the short-term nature of the loan. Payments are higher in order to pay back the loan in less time than a traditional mortgage.

Cash-Out Refinancing

Cash-out refinancing pays off the current mortgage and provides additional funds for renovation projects. The borrower takes out a loan based on either the current value or the estimated post-renovation value of the home. Numerous banks and lenders offer no closing cost refinance options for homeowners, saving on the administrative costs associated with refinancing. Having a no closing cost option increases the amount of funding available for renovations.

The benefit of cash-out refinance loans is that the borrower can fund larger projects, while still only making one monthly mortgage payment. If the lender bases the loan amount on post-renovation values, the borrower may qualify for more funding than with a home equity loan or other second mortgage option. Interest rates may be higher on a refinanced mortgage, but the payments are typically lower, since the loan terms stretch out over 30 years.

Which funding option a borrower chooses depends on his unique situation and the specific terms offered by different lenders. For some homeowners, low interest rates on a current mortgage and small funding needs make a home equity loan more attractive. For others, especially those with a high current interest rate or larger funding needs, mortgage refinancing is the better option.

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