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Mortgage Refinancing: Is Cash-Out the Answer for Your Home Improvement Loan?

by Gabriel  Traverso
Mortgage Directory Columnist

If you thought the mortgage process was nerve-wracking the first time, you might be feeling some anxiety when applying for a mortgage refinance. But if it's a home improvement loan you're after the options are really quite simple.

What are My Home Improvement Loan Options?

If you're planning either a do-it-yourself project or want to hire contractors for an extensive remodel the same challenge applies--how to pay for the project. Well, if you have equity in your home the logical answer is to draw from the equity and just put it back into the home. When it comes to a home improvement loan you essentially have three choices: cash-out refinancing, a home equity loan, or a home equity line of credit.

How do they Work?

Cash-out refinancing replaces your existing mortgage with a new larger one. The difference between your original mortgage and the amount of the new one is delivered to you as cash-out at closing. A home equity loan is a second mortgage behind your first and gives you the cash you need for your home improvements without changing the terms of your first mortgage. A home equity line of credit, also known as the HELOC, gives you what essentially amounts to a credit card that you draw against your home equity. These are your options, how do you know if cash-out refinancing is the right answer for you?

What are the Benefits of Cash-Out Refinancing?

Refinancing your mortgage usually makes the most sense when the mortgage you have now is adjusting upwards or the rate is higher than current mortgage rates. If you have an adjustable-rate mortgage, or an interest-only loan, then cash-out refinancing is probably your best option for a home improvement loan.

If your first mortgage has a low rate and is working for you, then you probably don't want to change it. In this case consider the home equity loan or HELOC for your home improvement loan options. Talk with a mortgage lender for more details and make sure to ask questions until you understand all the details of the loan you're considering.

About the Author
Gabriel Traverso is a freelance writer, independent musician, and artist. He resides in Reno, NV.

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