Ask an Expert: Refinancing to fund home improvements

Q: I recently took out a mortgage and now there are several things I want to do to my new home. Would it be advisable to refinance to cover the cost?

A: There are many good reasons to refinance your mortgage, and funding major home improvements can be one of them. In some cases, however, an alternative may be more appropriate.

Let’s first consider refinancing. In order to access funds to pay for improvements to your home, you would need to do a cash-out refinancing. This means taking out a new mortgage with a higher principal than your current one. For example, if you own a home worth $250,000 and have $150,000 left on the mortgage, you could refinance and take out a new loan of $180,000. You would then have an additional $30,000 in cash to pay for your renovation.

If you’re planning an expensive renovation, cash-out refinancing may be the best way to access your home equity at the lowest possible rate. However, if interest rates have risen since the time you took out your mortgage, refinancing could mean you’d end up paying a higher mortgage rate. In that case, a better option may be a home equity loan or line of credit. These options are also an excellent solution for financing smaller projects, as they don’t involve the expense of refinancing your primary mortgage. Plus, they still offer excellent rates because they are secured with your property. A home equity line of credit is particularly well suited to a long-term renovation project because it allows you to draw on the money as you need it rather than all at once.

It’s important to note that these options assume you have a fair bit of equity in your home. If you only recently bought your home (especially if it is your first home) you may not have had time to accumulate much equity. If this is the case, or if you prefer not to tap into your equity, you may want to consider a personal loan or unsecured line of credit. These can also be good choices for small renovation projects, since it will rarely make sense to do a cash-out refinance to access less than $10,000. Personal loans and unsecured lines of credit do carry higher rates than those secured with your home, but they can be helpful, provided you have the self-discipline to maintain a strict repayment schedule.