Maintaining and upgrading your home can get expensive. Experts estimate homeowners spend the equivalent of 1 to 4 percent of their home’s value on repairs in a given year. As of 2013, the average bathroom remodel costs $15,782; adding a master suite, $101,873, according to Remodeling Magazine’s 2013 Cost Vs. Value Report. Ideally, homeowners would have cash set aside in savings to fund both regular upkeep and desired renovations. But with the right strategy, you may also be able to tap into your home’s value to pay for such projects.
Lower rates have made refinancing attractive, because it can result in lower monthly payments -- and extra cash in hand to use for home repairs or to save up for them. “If a homeowner can improve his cash flow, and if that improvement exceeds the cost of the refinance, it’s worth it,” said Malcolm Hollensteiner, director of retail lending sales and products for TD Bank.
Average 30-year mortgage rates fell over 2012 from 4.24 percent in January to 3.62 percent in December, according to HSH Associates, a mortgage information firm. In June 2013, rates were still well below 4 percent. Crunch the numbers to figure out how fast you’ll break even.
Experts estimate that homeowners may spend an amount equivalent to 1 to 4 percent of their home's value on repairs each year.
— Beth Davies, personal finance writer
With this kind of refinance, you’re taking equity out of your home in a lump sum, which can make sense to help fund a big life change like sending a child to college or making a major home addition, says Debra Goodrich, executive vice president of home loans at Sterling Bank, which has locations in Washington, Idaho, Oregon and Montana.
How much you can take depends on how much equity you have and how much you owe in relation to the property’s value. Watch out for fees, though. “The cost can be higher [than a regular refi] because the loan is bigger,” she said. Such refinancing can
also add to your monthly mortgage, since the larger loan could counterbalance any decrease in rate.
Home Equity Loan
Home equity loans tend to be a less popular option when mortgage rates are low, says Hollensteiner. Homeowners would rather refinance their mortgage to take cash out or get a lower rate, than pay a higher interest rate on a second loan. In mid-May 2013, a $30,000 loan averaged rates of 6.19 percent -- well above 30-year mortgage rates.
But if mortgage rates rise, taking a home equity loan becomes more attractive. “People don’t want to refinance then and give up their great rate,” he said. Loans are usually limited to 75 to 80 percent of your home’s value, less the amount owed on the mortgage.
Home Equity Line of Credit
Called a HELOC for short, this credit line is linked to your mortgage and limited to a portion of your home’s equity. As with a credit card, borrowers pay interest only on charges that aren’t paid off immediately, says Barry Habib, chief strategy officer for Residential Finance Corporation. But they’re much cheaper. In mid-May of 2013, a $30,000 HELOC had an average rate of 5 percent, while low-interest credit cards averaged 11.01 percent, according to Bankrate.com. Plus, that interest may be tax-deductible as part of the mortgage interest deduction.
Borrowers can’t count on HELOCs to stay cheap, though. Rates fluctuate. “Should economic conditions improve and [the federal funds rate] rise, the cost of HELOCs can very rapidly change and wind up costing much more than typical mortgages,” he said. Lenders may also cut your line of credit if you don’t use it occasionally.
For a major addition or renovation, lenders may offer a construction loan, which is a short-term loan paid out to cover the building costs as needed. “We will appraise the property based on what its eventual value will be,” said Hollensteiner. Construction loan rates are often competitive, he says, and may be just 0.25 percent higher than regular loan rates. Sorry, small projects don’t apply.