You’re excited about the prospect of a major kitchen re-do, master bath reinvention, attic conversion, or another home improvement project. You’ve considered a cash-out refinance, which allows you to tap into your home’s equity and pay for these upgrades.
But you’re not sure: Should you refinance after renovation or before?
The right answer will depend on many different factors, including your financial situation, the mortgage rate you can lock in, your remodeling timeline, and your short- and long-term objectives.
Key Takeaways
- Refinancing ahead of renovations offers fast access to cash and the chance to reduce monthly payments and secure lower interest rates, which can jumpstart projects and keep expenses under control.
- Waiting to refinance until after renovations could boost home equity, qualify you for more favorable loan terms, and increase the potential for a larger cash-out if your property value rises.
- Refinancing at either stage comes with risks, including possible project setbacks, missed chances for lower rates, or appraisal challenges that could impact loan approval and expenses.
4 Reasons to Refinance Before a Renovation
There are many rationales for a cash-out refinance, as well as good candidates for doing so, prior to making home improvements. Let’s explore each of these reasons.
1. Access Cash Quickly for the Renovations with a Cash-Out Refinance
Refinancing before renovations can be beneficial if you need immediate cash flow for the required labor and materials.
“In my experience flipping over 200 houses, quick access to funds can mean the difference between a project starting immediately or stalling due to financial constraints,” says Daniel Cabrera, owner/founder of Sell My House Fast SA TX. “This is particularly helpful if you are working on a tight timeline and want to move fast.”
Martin Orefice, CEO of Rent to Own Labs, agrees.
“Refinancing your home is a great way to pay for improvements on it. A cash-out refi is a low-cost way to get renovation funds, and it has the added bonus of improving your property value – therefore boosting your home equity,” he says.
2. Lower Your Monthly Payment to Make Room for Renovation Costs
Refinancing can also enable you to lower your monthly mortgage payments, depending on your borrower profile.
“Reducing your monthly payments could free up more room in your budget to cover renovation costs or even allocate those savings directly into your project,” explains Robert Shepherd with Peak & Home Partners.
3. Lock in Lower Rates
When rates drop, it’s a great time to find a lower rate than you are currently paying.
“Securing the lowest possible interest rate is always a smart move, whether or not you are refinancing,” adds Orefice.
Locking in a lower rate today can also provide peace of mind and budget stability, ensuring your payments remain manageable as you embark on your renovation journey, per Shepherd.
4. Stabilize Mortgage Payments for the Future
Do you currently have an adjustable-rate mortgage (ARM), and are you paying a higher rate today than you were earlier or than you can secure by refinancing? If so, it’s probably a good time to jump ship and commit to a refinance.
“By refinancing, you can convert from an ARM to a fixed-rate mortgage, thereby stabilizing your payments. This ensures that any future interest rate hikes won’t affect your mortgage payments, helping you manage your finances with more certainty,” Shepherd continues.
3 Reasons to Refinance After a Renovation
On the other hand, postponing a refinance until after your remodeling work is completed can be a better idea for certain borrowers. Here’s a breakdown of compelling reasons to wait it out.
1. Increase Home Equity and Remove PMI
“Waiting to refinance until after renovations could pay off big time,” notes Andrew Lokenauth, a personal finance expert with BeFluentInFinance.com. “Your home’s value will likely increase, potentially leading to better loan terms, possibly a lower interest rate, and even more equity to draw from.”
Plus, if you’ve been forced to pay for private mortgage insurance (PMI) because your home equity position was less than 20%, you could now be in a more favorable position to eliminate PMI – assuming your home equity has increased enough.
2. Hold Out for Sharper Interest Rate Drops
Delaying a refi post-renovation can also pay off if mortgage rates drop even further in the near future.
“Timing is crucial in mortgage refinancing, and holding out for a more favorable rate could save you thousands in interest over the life of the loan,” says Shepherd.
3. Access Even More Cash Once the Home Value Has Increased
You may be able to cash out even more money after home improvements, assuming your home value increases.
“After renovations, your home may appraise for a higher value, which could provide more cash if you decide to do a cash-out refinance,” Shepherd points out. “The more your home is worth, the more equity you can tap into for future financial needs.”
The trick will be finding a way to pay for renovations in the first place. You might able to borrow the funds, but make sure you pay off borrowed funds with the cash you receive from the refinance.
Drawbacks to Refinancing Before or After Remodeling
Of course, refinancing prior to or following home upgrades can have its risks and disadvantages, too. Here are some common downsides to consider.
Cons to a Refi Before Renovating
- Increased debt. When refinancing before renovations, you could increase your overall loan balance, particularly with a cash-out refinance. This could extend your repayment period or even result in higher overall interest costs.
- Renovation delays. “You need to go through the refinancing process before you can begin your renovation, which could delay your project if the refi process takes more time than you anticipate,” cautions Shepherd.
- Less equity to tap. If you wait to refi until after the work is done, it’s likely your home equity will rise, meaning you’ll be able to liquidate even more of it if you choose. But if you refi ahead of remodeling, your tappable equity will probably be less.
- Underestimated costs. You may not tap enough equity to cover your renovation expenses. Consider that many home improvements end up costing a lot more than anticipated.
Cons to a Refi After Renovating
- Missed lower rate opportunities. Rates might rise by the time you finish the project.
- Larger debt payments. “If you are financing your renovation project with high-interest credit cards or loans, you could face higher overall costs until you refinance,” Shepherd says.
- Project delays or reduced scope. Without the extra cash on hand from refinancing, funding your renovations could be challenging. You may face delays or be forced to downsize the project, impacting your renovation schedule and the scope of the improvements.
- Higher borrowing costs. Delaying a cash-out refi might leave you with fewer options for financing your renovations. This could mean resorting to higher-cost alternatives like credit cards, personal loans, or dipping into savings, which can be more expensive than refinancing your mortgage.
- Risk of lower appraisal value. The post-renovation appraisal might not reflect the value increase you expected. If the appraised value falls short, it could reduce your chances of getting the best refinancing terms, and you may even be required to pay mortgage insurance.
- Missed tax savings. “Interest on home-improvement loans are often tax-deductible, which could sweeten the deal even further if you refinance before renovations. Always consult with a tax pro to understand how this might impact your specific situation, however,” recommends Lokenauth.
Alternatives to Refinancing Before a Renovation
A mortgage refi isn’t your only choice here. Don’t overlook worthy alternative financing options.
“A home equity line of credit (HELOC) could be your golden ticket. It offers flexibility without the need to refinance your entire mortgage; think of it as a credit card secured by your home’s value – you can use what you need when you need it,” says Lokenauth.
Or, you could pursue a home equity loan, which provides a lump sum payment at closing, commonly with a fixed interest rate.
“This is an excellent choice for homeowners who need a set amount of money for renovations without wanting to refinance their entire mortgage,” adds Shepherd.
A personal loan could be a quicker and simpler strategy for smaller renovation projects. Although interest rates on personal loans are typically higher than for home loans, this choice avoids the complexity of refinancing or tapping into your home’s equity.
Instead, consider a specialized renovation refinance loan, such as Fannie Mae’s HomeStyle renovation loan or the FHA 203(k) loan, which combines the cost of refinancing a home and renovating it into one mortgage.
“These loans are tailored for homeowners looking to upgrade their property while financing both the home and the improvements,” Shepherd says.
Ready to Take the Next Step?
Weigh the pros and cons of refinancing a mortgage carefully before committing—whether you prefer doing so ahead of renovating or after it.
“Timing is everything when it comes to refinancing and renovations. Keep a close eye on interest rates and market trends. If rates are at rock bottom, it might be worth refinancing before renovations to lock in those savings now. But if experts predict a rate drop, holding off could be the winning strategy,” suggests Lokenauth.
Also, ponder your long-term goals: Are you expecting to remain in place for years to come? If so, a refi before renovating could make more sense to spread out your costs. However, if you are thinking about selling soon, waiting until after renovations could boost your home’s value and your potential profit.
Lastly, keep in mind that renovations don’t always go as expected. If you refinance ahead of remodeling, you’ll have the money on hand to handle any unexpected twists and unforeseen circumstances.
“But if you wait, you might be able to borrow more based on the increased value of your improved home,” adds Lokenauth.
