Finding the Best Financial Strategy for a Home Renovation

When you’re ready to transform your current living space into the home you’ve always envisioned, having the right financial strategy is just as important as choosing your perfect design details.

Whether your sights are set on a new gourmet kitchen, an elevated outdoor living space, or a completely remodeled home, design-build renovations require thoughtful financial planning.

Many of the clients we work with have a large amount of equity in their property and they’ll often ask how they can best leverage that equity for a home upgrade.

Let’s look at three popular financing options you can consider for a renovation project – a Cash-Out Refinance, Construction Renovation Loan, and Home Equity Loan.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger loan based on your home’s current value. The difference between your new mortgage and your previous mortgage balance is provided to you in cash, which you can then use to fund your renovation.

This option can work particularly well for homeowners who purchased their property when interest rates were higher than current market rates. You can maintain the simplicity of a single mortgage payment while accessing the funds needed for your project.

Benefits:

• Lower interest rates compared to most other financing options
• Maintains the convenience of a single monthly payment
• Allows for extended repayment terms, keeping monthly payments manageable

While a cash-out refinance often makes financial sense, know that you’ll have typical mortgage closing costs and could potentially increase your overall mortgage balance. For more substantial projects like a total kitchen remodel or an owner’s suite transformation, these costs are often offset by the increased home value.

Construction Renovation Loan

For larger remodeling projects that can significantly enhance your home’s value, a construction renovation loan can have unique advantages. This specialized financing option bases your loan amount on your home’s projected post-renovation value, not just its current worth.

The distinguishing feature of this loan is its disbursement structure. Funds are released to your contractor in installments as project milestones are completed. This ensures funds are properly allocated to your renovation – a safeguard that many clients appreciate.

Benefits:

• Finances are based on your home’s future value after improvements
• Ideal for extensive renovations or total home transformations
• Often offers competitive interest rates
• Ideal for coordinating larger projects with multiple phases

A construction renovation loan can require more extensive documentation and lender oversight. While this means additional paperwork, many clients value the structured approach when taking on bigger renovations that will enhance their lifestyle and property value.

Home Equity Loan

A home equity loan functions as a second mortgage and allows you to borrow against your property’s existing equity in a lump sum. For homeowners who have built strong equity over time, this can be a great way to access renovation funds quickly.

This option provides a revolving line of credit that can be particularly beneficial when managing upfront costs for materials or securing a design-build contractor for your project.

Benefits:

• Typically involves lower fees and faster processing than refinancing
• Available with fixed interest rates for predictable monthly payments
• Well-suited for smaller to medium-sized projects
• Flexible repayment terms can range from 5-20 years

Home equity loans generally carry higher interest rates than cash-out refinancing or construction loans. And since your home serves as collateral, it’s important to have a repayment strategy based on your project timelines and budget.

Helping You Make the Right Choice for Your Home Renovation

Since your best financing option will depend on a variety of factors – current mortgage rate, available equity, project scope, etc. – we recommend consulting with a financial professional in the early stages of your planning.

Our preferred lending partners, LMC Homes Loans and Members 1^st Federal Credit Union, are both trusted institutions that have served the southcentral PA region for decades and helped guide many EGStoltzfus clients through their financial decision-making process.

Connect with LMC or Members 1^st directly to start a conversation, or contact our team to discuss your project vision and how we can help bring it to life.