Dreaming of a brand-new kitchen, an updated bathroom, or finally finishing that basement in your Michigan home? Many homeowners want to upgrade or update spaces in their homes, but are unsure how to pay for them. That’s where a cash-out refinance can become your smart budget partner!

As we talked about before, a cash-out refinance lets you borrow more than you currently owe on your home loan and get the extra amount in cash. This “cash out” comes from your home’s equity – the part of your home you already own. It’s like unlocking the value you’ve built up in your property and putting it to work for you.

But how do you use it smartly for home improvements here in Michigan?

Step 1: Figure Out How Much Cash You Can Get

Before you start picking out new countertops, you need to know how much money you can access. Lenders typically let you borrow up to 80% of your home’s current value with a conventional cash-out refinance.

Here’s how to get a rough idea:

1. Estimate Your Home’s Current Value: An appraiser will give an official value later, but you can get a good estimate by looking at recent sales of similar homes in your Michigan neighborhood.
2. Calculate Your Available Equity: Let’s say your home in Livonia is worth $350,000, and you still owe $200,000 on your mortgage. You have $150,000 in equity.
3. Find Your Maximum Loan Amount: If the lender allows you to borrow up to 80% LTV, your new loan could be up to $280,000 (80% of $350,000).
4. Subtract Your Old Loan: From that $280,000, you’ll pay off your old $200,000 loan and subtract closing costs and pre-paid expenses. That leaves you with a range of $70,000-$75,000 in cash to use for your renovations!

Step 2: Plan Your Michigan Home Improvement Budget Wisely

Once you know your potential cash amount, it’s time to budget for your projects. This is where “smart” comes in!

• Get Detailed Estimates: Don’t just guess! Talk to contractors in Michigan to get clear quotes for the work you want done. Make sure their estimates include materials, labor, and any permits needed.
  • Kitchen Remodel: A minor kitchen remodel in Metro Detroit might cost you around $27,000 – $30,000, while a more significant one could be $50,000 or more.
  • Bathroom Remodel: A mid-range bathroom update typically ranges from $8,000 to $25,000 in Michigan.
  • Basement Finishing: Finishing a basement in Michigan can vary widely, from around $20,000 for basic to $70,000+ for a more complex remodel with a bathroom or wet bar.
• Build in a Cushion: Always add an extra 10% to 20% to your budget for unexpected costs. Home renovation projects often uncover surprises!
• Prioritize Projects with Good Return on Investment (ROI): Not all renovations add the same value to your home, especially if you ever plan to sell. In Michigan, some projects known for good ROI include:
  • Minor Kitchen Remodel: Often recouping a high percentage of costs.
  • Bathroom Remodels: Especially updating primary bathrooms.
  • Basement Finishing: Adding livable square footage significantly increases value.
  • Adding a Deck or Patio: Outdoor living spaces are very appealing.
  • Curb Appeal Projects: Like a new garage door or front entry door.

What if a Cash-Out Refinance Isn’t Enough?

Sometimes, you might have a big renovation project in mind, but your home’s equity (and the conventional 80% LTV limit for cash-out refinances) doesn’t give you all the cash you need. Or maybe you’re buying a “fixer-upper” and need money for repairs right away.

In these situations, there are other special loan programs that can help you finance home improvements at a reasonable interest rate:

• Fannie Mae HomeStyle Renovation Loan: This loan lets you combine the cost of buying or refinancing your home with the cost of renovations into one single mortgage. The cool thing is that the loan amount is based on what your home is expected to be worth after the renovations are done – not just its current value. This can mean more money for your projects! It’s a conventional loan, so it might require a slightly higher credit score than FHA loans (often 620+ credit score) but can be very flexible with the types of repairs.
• FHA 203(k) Renovation Loan: This is another great option, especially for homes that need more extensive repairs. Like the HomeStyle loan, it allows you to roll renovation costs into your mortgage, based on the home’s value after the improvements. FHA 203(k) loans are backed by the government, which often means they have more flexible credit requirements (sometimes as low as a 580-credit score) and lower down payment options than conventional loans. There are two types: a “Limited” 203(k) for smaller, non-structural projects (up to $70,000) and a “Standard” 203(k) for bigger jobs, including structural work. The property must be your primary residence.

These options can be a lifesaver if your desired renovation costs more than what you can get from a standard cash-out refinance. They both aim to give you the funds you need by looking at your home’s “future value.”

Weigh the Pros and Cons

Using your home’s equity through a cash-out refinance or a renovation loan can be a smart and affordable way to make those dreamed-about improvements to your Michigan home. It requires careful planning and a clear budget.

Pros:

• Lower Interest Rate: The interest rate on these loans is usually much lower than credit cards or personal loans.
• One Monthly Payment: You combine your mortgage and renovation costs into one easier payment.
• Potential Tax Deductions: The interest on your mortgage (including the portion used for home improvements) is often tax-deductible. (Always check with a tax advisor!)

Cons:

• You’re Adding to Your Mortgage: This means you’ll pay interest on the renovation money for the life of the loan.
• Closing Costs: Remember, there are fees to refinance, which will come out of your loan or your pocket.
• Reducing Your Home Equity (Temporarily): While your renovations might increase value, you’re taking out a chunk of your equity immediately.

Ready to transform your Michigan home with smart renovations? Don’t let questions about financing hold you back! As an experienced mortgage lender and CDLP with 25 years of experience helping homeowners across Michigan, I can help you understand your cash-out refinance options and also tell you if a Fannie Mae HomeStyle or FHA 203(k) loan might be the perfect fit for your renovation dreams. Contact me today for a personalized plan to fund your home improvement goals!