Getting a Home Improvement Loan To Remodel

I want to refi and take out $10,000 to remodel. Is it better to refi and take out the cash or to refi and then take out a home improvement loan?

5 Answers

The best thing to do is to find out what the rates are for both of your options. However, refinancing and then taking out a home improvement loan might cause you have unnecessary expenses. Factors to considered are also loan terms. Based on such little information in the question I would say cashing out on a refi might make sense (if you qualify for a low rate). At the end of the day, I'm not sure I would refinance a loan (Even a small one) for only $10,000.00, with closing costs and fees my loan might be up $13-15K and that's not counting the interest I'll pay over the years. For such a small cash-out, I say don't refi. You're better off making the $10K.

You'd end up doing two seperate loans by doing a refi and then following with a home improvement loan.  As a result, you'd probably end up paying loan fees twice.  However, depending on your circumstances, you may end up with a better rate on a refinance than on a cash-out loan and you may want to talk to your bank about doing a small $10K second loan for 5-10 years.  Depending on your credit, they may even do that as a signature loan with no lien, appraisal, or title costs.  The fees on such a loan should be fairly minimal.  Typically, you would need to do such a loan through whoever you do your banking with.  A mortgage company cannot usually do a loan that small. 

I would suggest that you contact a loan officer and discuss these options with him/her.  Your key item to investigate is what rate you would qualify for on a rate & term refinance versus a cash-out and even if you do qualify for a cash-out.  The guidelines on home equity loans (cash-out) have tightened considerably in recent years.  Also, there are usually minimum equity requirements associated with them.  I'm in Texas and we have very tight requirements.  The new loan amount cannot exceed 80% of the homes value (loan to value ratio).  Most other states are limited to 90%.  These valuations are based on the "as is" value (before improvements). There are also minimum credit score requirements on cash out loans. 

You do have one other option available to you that may meet your needs.  There is an FHA loan program called a 203K streamline that may work for you.  It combines and FHA refinace with a home improvement loan.  Many lenders don't do 203K loan though and you may have to look around for a lender.

The advantages of a 203K are:

  • Low FHA rates

  • Appraised value is "subject to" repairs, meaning after the improvements are made

  • The maximum loan to value ratio is 110% of the improved value

  • More flexibility on debt to income ratio and credit score than with conventional cash out loans. 

Here are the disadvantages of a 203K:

  • As I said, not all lenders do them

  • Some lenders may charge a higher rate for them (we don't)

  • While FHA allows the home owner to do many of the improvements themselves (if they are qualified) most lenders are going to require a contractor to be used

  • Fees on a 203K are slightly higher, probably about $450 in your case

  • Unlike a conventional casxh-out ot refinance loan, regardless of your loan to value ratio, you will be required to pay for mortgage insurance for a minimum of 5 years (MI is going up on Oct. 4th)

  • A 203K streamline loan is going to limit what improvements you can make.  Generally, it's limited to cosmetic repairs such as floors, paint, windows, doors, kitchens, bathrooms, siding, etc.  Major items such as room additions have to go under another 203K loan program (203K major) that is much more difficult to do and even harder to find a lender.

I generally find that it is easier, lower cost and much less paper intensive to just do a cash out refinance assuming that you have sufficient equity in the home. A straight refinance doesn't get into why and how you will spend the money. While I have worked in the mortgage industry for years, I still like having control over my personal finances and a straight up cash out refinance gives you that control.

With rates near 30yr lows another reason is that you can lock in the lower rates of today on a long term fixed refi. The key point is do you have sufficient equity in the current home as is to take out the $10K.

Also by doing a straight up cash out refinance the money controls are all in your hands and you can adjust your plans without having to talk with anyone or get an approval.

It really depends on if you would benefit from the refinance even if you did not need the cash out for home improvement. If you would not, I would recommend a home equity line of credit if you have enough equity to do it. Most lenders will give you up to 80 to 90% of the homes value combined between the first and second mortgage. If you would benefit from the refinance anyway, then getting the money for the improvement along with the refi would be the best option.

It is unlikely that you could get a home improvement loan from most banks in this market. You would most likely have to get one from a local or community bank as construction lending, including home improvement loans for the most part, is dead. So, either a home equity if you don't really need to refinance the first or do it all at once.

The answer to this question is going to vary according to your borrowing capacity, the value of your home, and the proposed value of the improvements. Factors such as credit, "loan to value ratio" (that is the percentage of your home's value that you are borrowing), and the time frame for completion (as rates change constantly) are all going to influence this decision.

I would recommend speaking to a reputable, LOCAL lender about your goals before you begin the process - ask about the possibilities both before and after, and get several rate quotes for the proposed loan.

According to his or her opinions and offers, choose which scenario makes most sense for you. If you decide to renovate first, KEEP CAREFUL RECORDS and receipts for everything you do. Many lenders will offer you a lower (non-"cashout") rate if you can document that every dollar borrowed beyond the costs of closing was reinvested into the house.