Many new home buyers plan to stay in their first home between five and seven years, but usually wind up living there for more than 10. Sometimes, their starter house becomes their family home, which is exactly what’s happening in my case. We planned on staying in our house for just a few years, and now we’re coming up on 11. Like many other families in our position, we love the location of our house, and our neighborhood is terrific, but we’ve long outgrown the tiny little house that was once perfect for our brand-new family.
Instead of going through the stress of buying a new house in a location that isn’t as great as where we are now, we can renovate! If you’re in the same situation, your first priority when embarking on a major home renovation should be to create a realistic budget. There are many sites online, such as HomeAdvisor, that can give you the average costs of home renovation projects. You should also consider talking to at least two or three general contractors to get estimates.
Many people go over budget despite their best efforts. Plan to spend at least 30% more than your estimated budget so you have a cushion for unexpected costs. Having a contingency plan early on will put you in a much better position once construction begins.
This all sounds great, but how are you going to get the cash to set up a budget? A home improvement loan may seem like the most likely choice, but it may not always be the right one for you.
A great way to get cash for your new home improvement without having to take out a new loan is a cash-out refinance. This type of refi can help you convert the equity in your home into cash that you can use to renovate or remodel.
Unlike a home improvement loan, a cash-out refi isn’t a second mortgage. It’s your primary mortgage. That’s a nice benefit because you only have one payment to worry about instead of two. A cash-out refinance works much like a regular refinance, but instead you refi for an amount that exceeds your current principal balance, and you keep the remainder in cash.
For example, if you bought your home for $200,000 10 years ago and have paid off $75,000 of the loan, you’d still owe $125,000. Now home prices are on the rise, and your home is now worth double. If you got a cash-out refinance for $250,000, you’d pay off the outstanding $125,000 balance and then take the remaining $125,000 for a remodel or renovations.
You shouldn’t have to move to find the house of your dreams. The house you want could be right under your feet, and it doesn’t have to be an expensive journey to get it there. Whether your project is large or small, a cash-out refi can help you get started.
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