Should I refinance to pay for home renovations?

By Sabrina Karl

Refinancing a mortgage can be a powerful tool for homeowners. While it’s often done to snag a lower interest rate, another popular reason is turning your home’s equity into cash for home improvements.

Increasing your mortgage balance to renovate or repair your home may be reasonable, or even smart. But not always. You’ll want to consider the trade-offs carefully.

For instance, if refinancing will substantially raise your interest rate, it’s likely not a great move. Also, if you think you’ll sell your home within the next few years, opting for a home equity loan or line of credit will probably serve you better than opening a new mortgage.

You’ll also want to forego refinancing if you don’t have upwards of 20 percent equity in your home. That’s because dropping below this threshold will trigger private mortgage insurance, which is an expense you want to avoid.

Also keep in mind that refinancing isn’t free – you’ll incur some costs for the privilege – and it will involve running a credit check, so will impact your credit score.

But if you expect to keep your home five or more years, and can get a comparable or better APR on your new mortgage, refinancing can be a good source of funding for that home improvement project.

Renovations like major updates or adding to a home’s size are good candidates for tapping home equity since they’ll also increase the value of your home. But cashing in equity for a new roof can also make sense, especially if your only other option is accessing a credit card or other high-interest loan.

In any scenario, the smartest move is researching what the refinancing will cost, how your other funding options and costs compare, and how the new mortgage amount and rate will affect your monthly payments.