Dollars and Sense: How A Cash-Out Refinance for Home Improvement Works

Melanie Sedam

Looking to make some major home improvements? Have you considered a cash-out refinance on your existing home? Refinancing is a low-interest way to get tax-free cash for remodeling your kitchen, building a pool in the backyard, or anything you choose to do.

Let us look at an example. Say you bought your home for $450,000, but you now believe your home is worth $600,000. After having the home for several years, you have paid your mortgage balance down to $400,000. To calculate how much equity you have, simply subtract your mortgage balance from your home value. This leaves you with $200,000 in equity.

But you cannot take all of that out as cash. In most cases, you will need to leave some money in the home to refinance. Assume you can only refinance 80% of the value of the home. That means you can borrow up to $480,000 in a new mortgage—giving you $80,000 in cash less any closing costs.

When you do a cash-out refinance, the cash you get is tax-free. Yes, you will have to pay it back as part of your mortgage balance, but it is at a much lower interest rate than you might otherwise get with an unsecured loan like a personal loan. You can use the cash for home improvements or anything else you need—debt consolidation, tuition, vacation. It is yours to do with as you please.

To take cash out, you need to have a certain amount of equity in your home. When you apply to refinance, your lender will require an appraisal of the property to determine property value. You can subtract your current loan balance from the appraised property value to determine how much equity you have in your home.

The best time to refinance your mortgage is when interest rates decline, and that time is now! Rates are the lowest they have been in years. The lower the interest rate you secure, the bigger your savings will be over time and on a month-to-month basis. If you refinance at the right time, you could find yourself in an even better loan than you had before. You could gain access to some of your equity and lower your mortgage payment at the same time.

Improvements can add value to your home. Add a lower interest rate and you will come out ahead if your house is worth more. The right home improvements could make your home more appealing to buyers down the line.

Mortgage interest is usually tax-deductible, but the interest on many other types of debt is not. Depending on where you live and the tax rules that apply to you, the interest you pay on your mortgage can be deducted. Check with a tax professional to see how this applies to you.

A cash-out refinance can be just the ticket if you are searching for a low-cost way to turn your home improvement list into a finished project or two. To see how much money you could get from your home, call me to discuss!

Melanie Sedam is the owner of that specializes in both conventional and reverse mortgage financing for the 55+ Active Adult Communities here in Arizona. Melanie can be reached at 520-829-5219, ext. 2.