How to refinance to pay for home renovations

This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer Home Equity Loans nor Home Equity Lines of Credit (HELOC) at this time. Please visit our HELOC page for future updates. Any information described in this article may vary by lender.

Quick insights

• A cash-out refinancerefinance-hl000061 allows you to replace your existing mortgage with a new mortgage amount, withdrawing the difference in cash.
• Homeowners must meet specific criteria set by the lender. These typically include having a minimum of 20% equity in your home, proof of stable employment and a DTI ratio below 43%.
• Some of the potential benefits of a home renovation are improved functionality, increased property value, enhanced aesthetics and personal satisfaction.

Renovating your home can breathe new life into your personal space or address crucial repairs. Renovations tend to come with unexpected costs that can quickly deplete your savings. Instead of risking your financial cushion, you may want to consider a cash-out refinance. A cash-out refinance allows you to replace your existing mortgage with a new mortgage amount, giving you access to the difference in cash to fund your projects. In this article, you’ll learn the ins and outs of a home refinance and the steps to successfully refinance your mortgage for your renovation project.

Benefits of a home renovation

A home renovation can make your home feel new again. And if your home needs repairs, it can be dangerous to delay. Whether you plan to sell your home in the future or remain there for many years to come, a home renovation can provide a wealth of benefits for you and your family. When planning a home renovation, consider these potential benefits.

• Return on investment. A kitchen or bathroom remodel is often a major selling point for prospective buyers. Upgrades and updates that add convenience and functionality will likely add value to your property.
• Prevent additional damage. Home repairs are costly but putting them off can cost more in the long run. For instance, delaying roof repairs can lead to wall, ceiling and structural damage over time.
• Make your home more enjoyable. Your home is likely one of the most expensive investments you'll ever make. Adding upgrades that improve the appearance and functionality of your space can make your home a more enjoyable space.
• Create the space you need. As your family grows, you may feel like your home is shrinking. A home renovation that adds extra bedrooms, bathrooms or living space may be the improvement you need to make everyone comfortable again.

Using a cash-out refinance to pay for home improvements

A cash-out refinance can be a smart strategy for homeowners looking to finance home improvements while potentially benefiting from lower interest rates. Here’s an example below: Sarah has a home valued at $300,000.

• Current mortgage balance: $200,000
• New mortgage amount: $240,000
• Cash withdrawn: $40,000
• Purpose: Use cash to remodel your kitchen
• Benefit: Enhances living space and potentially increases home value

By using a cash-out refinance, Sarah replaces her old mortgage with a new one. While her monthly payments might increase slightly, the improvements could significantly boost her home’s resale value in the long run.

Benefits of using a cash-out refinance

Here are some potential benefits of using a cash-out refinance:

• Access to cash: You can access cash for major expenses like home improvements, education, investment opportunities, or debt consolidation.
• Lower interest rates: Cash-out refinancing often comes with lower interest rates compared to personal loans or credit cards, possibly saving money over time.
• Tax benefits: In some cases, interest on the new mortgage may be tax-deductible, particularly if the funds are used for home improvements. Please consult with your tax advisor.
• Increased home value: Financing renovations could enhance the value of your home, potentially yielding a higher resale price.

Qualifying for a cash-out refinance

To qualify for a cash-out refinance, you typically need to meet certain requirements:

• Equity in your home: Lenders usually require that you have at least 20% equity in your home, meaning the amount owed on your mortgage should be significantly less than the home’s current market value.
• Credit score: A good credit score is critical. Most loan providers prefer a score of 620 or higher, though some may offer options for lower scores.
• Debt-to-income (DTI) ratio: Lenders assess your DTI ratio. A general rule of thumb is to keep your overall DTI at or below 43% because it’s the maximum debt-to-income ratio a borrower can have to qualify for a mortgage.
• Employment and income stability: Proof of stable employment and consistent income is required to demonstrate your ability to repay the new loan (i.e., pay stubs or tax returns).
• Loan-to-value (LTV) ratio: Lenders typically allow a maximum LTV ratio of around 80%, meaning you can borrow up to 80% of your home’s value when factoring in the new loan.

Alternative ways to finance a home renovation

When it comes to financing home renovations, there are several alternatives to cash-out refinancing. Each option has its own advantages and considerations.

Home equity loan

A home equity loan allows you to borrow against the equity in your home, providing a lump sum with a fixed interest rate and repayment term. This is an excellent choice for larger renovation projects, offering predictable monthly payments and generally lower interest rates compared to unsecured loans. Please note that Chase does not offer home equity loans.

Home equity line of credit (HELOC)

A HELOC gives you access to a revolving line of credit based on your home’s equity. This flexibility allows you to draw funds as needed, making it suitable for ongoing renovations or projects that evolve over time. While interest rates may be variable, this option can be cost-effective for homeowners who plan to borrow incrementally. At this time, Chase does not offer HELOCs.

Personal loan

Personal loans can be a quick and straightforward way to finance renovations, often requiring less documentation and offering a faster approval process. These unsecured loans typically have higher interest rates than home equity loans but don’t put your home at risk. They are usually better suited for smaller projects or homeowners who prefer not to leverage their property. Chase does not offer personal loans.

3 things to consider before choosing a cash-out refinance

When deciding if a home refinance is the best way to pay for your renovation project, consider these factors:

1. You may end up with a higher monthly payment

Refinancing your mortgage means restructuring the terms of your loan. Fees like closing costs are added to the new loan. If you receive cash back as part of your refinance, you could end up with a higher monthly mortgage payment or longer loan term. Discuss these potential costs with your lender.

2. The purpose of your home improvements

Weigh the long-term value of your renovations against the cost before using your home for collateral.

3. Is refinancing the best way to accomplish your goals?

Discuss all your options with your lending advisor before making a final decision. If you're planning a smaller renovation, a HELOC or personal loan might be an ideal option to access cash. If you're approaching the end of your loan term or have a low interest rate, changing the terms of your mortgage might not be a good idea.

5 steps to refinancing your mortgage for a home renovation

Refinancing means getting a new loan, so you should plan for your refinance in much the same way as your original mortgage. Take these steps to refinance your home to pay for renovations:

1. Get your credit score in top shape.
2. Determine the type of loan that best fits your needs.
3. Gather documents you'll need to complete the application (such as W-2s, pay stubs, tax returns, investment account statements and bank statements).
4. Complete the application.
5. Continue making payments on your current loan until it's paid off.

If you're planning an upcoming home renovation but don't think your savings will cover the costs, refinancing may be a good solution.