That gives you a chance to recoup the costs of refinancing, typically 2% to 5% of the mortgage. Check your closing costs against your project’s budget to be sure the new mortgage will be worth it. Closing on a $250,000 refinance could cost as much as $12,500, but homeowners plan to spend only an average of $11,851 on home improvement projects this year, according to LightStream’s survey.
You’ll recoup more of those costs over the life of the loan if you stay in the home long-term, Sachs says. He recommends seven or more years as a general rule.
“If you’re planning on living in this house for, let’s say, the next 10, 20 or 30 years, then it’s not a financial payoff,” he says. “It’s the enjoyment of the property and being able to lock in very low rates.”
2. Home equity line of credit
HELOCs are a common choice for home improvement financing, but recent changes in the economy have prompted some lenders to shy away from offering them, says Charlie Rocco, financial planner and managing director at Moneco Advisors in Connecticut.
The money you receive from a HELOC comes from your equity, which is the value of your home minus the amount you owe on it. It’s a second mortgage, so you’re using your house as collateral.
HELOCs have a draw period, usually 10 years, when you can use some or all of the funds you’re approved to borrow. During that time you usually make interest-only payments, Rocco says. You’ll repay interest and principal during the later repayment period.