Remodeling Instead of Moving: And How to Pay for It

You feel like you’ve outgrown your house. Or maybe you just crave something new. The idea of moving is daunting, especially if that “outgrown” feeling is due to a new baby or an elderly parent moving in.

Plus, you love your neighborhood. It’s hard to imagine leaving! Maybe what you really need is to remodel your current house, adding on if you need to, and updating the things you’re tired of seeing.

Do you like to spend hours on Realtor.com, perusing the houses for sale, with their chic modern kitchens? Who says you can’t have one of those without moving at all?

Why a renovation may be your answer

You may be wondering how to pay for a big (or small or medium-sized) renovation, especially if you’re going through other big changes that may require funds. Buying a new house might seem like the simplest solution, because your mortgage might be a little higher every month, or you could move to a less expensive neighborhood and get more house for your money. But if you’ve built enough equity in your home, a home equity loan or a cash-out refinance could be the perfect way to pay for that new kitchen. Or nursery...or mother-in-law suite...

So, how do you make it happen?

Because a HELOC is secured by using your house as collateral, you’ll get a much better interest rate than you would with an unsecured loan, like a credit card. Your other option, which can also be a good one if you have a lot of equity in your home, is a cash-out refinance. If mortgage rates have gotten better since you originated your first mortgage, or your credit score has improved giving you access to better rates, this is a particularly good option. In a cash-out refinance, you refinance your whole mortgage, securing a mortgage for more than the original one -- generally no more than 80 percent of the current value of your house -- and you’ll get cash back after closing. That cash represents equity in your home, and you’ll have less, so don’t pick this option just to get the money. A cash-out refinance is a good choice for people who have a good idea of how much they need.

A cash-out refinance may be a better choice than a HELOC because you can get a fixed interest rate. (Most HELOCs offer variable interest rates.) The upside to a HELOC is that it’s a line of credit, not a lump sum loan, so you only borrow what you need at any given time. Depending on your personality, this may make you spend less on your renovation because you’ll be writing a check for each step along the way, which may make you think twice about individual components. How much do you really need that French stove? Enough to write another check?

Because your renovation or addition is likely a capital improvement, one that adds value to your home, your loan to value ratio may be lower than you think when the project is finished. Isn’t that good news? And while a big project can make life in your home inconvenient for a while, it’s easier than moving. Besides, it might be fun to get takeout every night while the kitchen is being remodeled. However you choose to pay for your renovation or addition, it’s definitely worth considering before you pick up and move!