Home Improvement Loans

Typically people looking for cash for home improvements have gone straight to a second mortgage, or an equity line of credit, but there is no reason why you could not take out a new loan to refinance your first mortgage and use the equity you take out to make home improvements.

It is a well-known fact that a mortgage loan for making home improvements is one of the best investments you can make. The improvements will, after time, help increase the value of your home to the point where, hopefully, you will actually make a profit on your loan. This will hold especially true when you add in the tax benefits of the new loan.

Generally speaking you would consider a new first mortgage over a second mortgage for a home improvement loan when two conditions are present. First, that interest rates have dropped by at least one percentage point since you took out your first mortgage, and, secondly, that you have sufficient equity in the home.

There are basically two ways to get at the equity in your home when you refinance a first mortgage. First, if you have been paying on your mortgage for a while you will have created equity through the monthly buy-down of the principal of your loan. If there is sufficient equity from principal reduction then it may be possible to get a new first loan for the same amount as the previous first loan and pocket the difference created by the principal reduction.

The advantage to getting a new loan for the same amount as the old loan is that your new mortgage payments will be the same or lower. Note: Your mortgage payments will be lower if the new loan is at a lower interest rate.

If the majority of your equity has been created by the appreciation of your property’s value and not by the pay-down of principal, then you will probably need to take out a new loan for a greater amount than the original first loan in order to have any cash equity left over once the old loan is paid off in full. However, depending on how much of a savings you will realize because of the lower interest rate on the new first mortgage, your monthly mortgage payment could be priced at a higher rate.

It is important to look at all aspects of a loan before making a commitment and, ultimately, choosing a loan. The overall idea is to either refinance your first mortgage or take out a second mortgage that will best achieve your goal at the least cost.