The home improvement loan vs. refinance debate rages in many homeowners’ minds at one point in time, especially when they are considering costly renovations. In a nutshell, there are three main loan options. Refinancing pays off your remaining mortgage balance in exchange for a new one, ideally at a lower interest rate. In contrast, a home equity loan gives you cash in exchange for the equity built in your property as a separate loan. Many roofers also offer financing options to make your replacement as easy as possible.
Home Improvement Loan vs. Refinance
Should you get a loan or refinance when you want to have some work done on your home? Let’s break down the two options:
Refinancing
There are two standard methods of refinancing your mortgage:
- A rate-and-term refinance does not involve money exchanging hands other than the closing costs. Here, a new loan repays the old one to secure better terms such as lower interest rates.
- Cash-out refinancing will pay off the old loan leaving the homeowner with extra cash for a renovation project.
The pros of refinancing include:
- You take advantage of low-interest rates and monthly payments
- You receive money to improve your home’s value without requiring any cash or paying out of pocket
- You can use the leftover money for another expense
- You can eliminate private mortgage insurance (PMI) by lowering your loan-to-value (LTV) ratio
The cons include:
- You will pay closing costs, usually between two and five percent of the loan amount
- You put your home up as collateral and risk foreclosure if you fail to repay
- It takes longer to close than a home equity loan
- You may not receive enough money for the renovations you wish
Home Equity Loan
A home equity loan leverages your home equity (the money already paid towards your home) to guarantee you will repay the loan offer. Typically, you can borrow up to 85% of your home equity and receive the money in a lump sum. As with refinancing, you risk losing your home if you cannot pay off the loan.
Home equity loan terms range between five and 30 years, and the interest rate hovers around five percent.
The pros of a home loan are:
- A fixed interest rate
- Lower borrowing costs because you secure the loan against your home
- Use the money to finance any project you wish
- Enjoy tax-deductible interest payments if you use the money to improve your home
The cons include:
- You put up your home as collateral
- You will pay closing costs ranging between two and five percent of your loan amount
- You will have two separate mortgage payments
Which is the Better Option?
The better option between refinancing and taking a home equity loan depends on your circumstances.
Refinancing is the right choice if:
- You have built some equity in your house and have paid off over 20% of its current value
- You plan to remain in the home for a while
- Your renovation project is costly
- You can afford the closing costs and other related fees
A home equity loan is the better choice if:
- Your current interest rate is low, and refinancing will significantly increase it
- You can afford two loan payments comfortably
- You don’t wish to pay high closing costs
- You plan on selling soon
- You need a short application-to-closing process
Homeowners should consider consulting a personal finance professional before making a decision.
No matter where you lean towards in the home improvement loan vs. refinance debate, both options will affect you. First, you will put your home as collateral for the loan in both cases, risking foreclosure should you fail to repay on time. Second, you will still contend with closing costs and other associated costs like the lender’s fees.
On the flip side, you will get the financing you need to make home improvements, such as a roof replacement. Replacing your roof could result in reduced energy costs and improved curb appeal.
Financing from Your Roofer
A better option is receiving financing from your roofer because you avoid risking your home as collateral and additional costs like lender’s fees and closing costs. Additionally, your roofer may offer better terms and rates plus other perks such as promotions or special interest rates from a partner financial institution.
Alan’s Roofing offers stress-free roofing financing options in Central Florida catered towards our clients’ specific projects. Our financing options cover a range of residential roofing services, including repair, replacement, installation, and emergency services. We believe nobody should overlook or sacrifice the quality of their roof to fit a budget. Work with Alan’s Roofing in Central Florida on your next roofing project. We offer a free initial estimate and convenient roofing financing options. Contact us today.
