Should You Refinance Your Mortgage to Pay for Home Repairs

A Home Buying Article Contributed by Robert Scalia

When Paying for Home Repairs, Should One Refinance Their Mortgage?

People often tend to think that mortgage refinance is a good way to raise money for home repairs.

But whether or not it makes more sense to refinance your mortgage and take cash out or borrow that same money using a home equity loan depends on a person's financial goals, the interest rate of any new loan, the interest rate on the existing mortgage and the peron's ability to apply the mortgage interest deduction on his/her income taxes.

So How Does One Determine If Mortgage Refinance is the Best Way?

A good way to make an informed decision on this is to look at the weighted APRs of both loan alternatives. It may sound like a complicated thing to do, but it's actually pretty easy.

All you have to do is take the interest rate of each loan and multiply it by its portion of the total debt. For example, we'll say a homeowner owes $100, 000 on an existing mortgage and has planned to spend roughly $50, 000 on renovations.

Before he decides to refinance his mortgage, he considers taking out a $50, 000 home equity loan or line of credit. This means he/she would owe a total of $150, 000. Therefore, to get the weighted APRs, he or she would have to multiply the rate of the $100, 000 mortgage by two-thirds and the $50, 000 equity loan by one-third.

Obviously, the homeowner is going to want to pick the alternative that has the lowest weighted APR with payments that fit his budget. To make this relevant and determine if mortgage refinance is the better option, you can use the bankrate loan calculator to determine your payments.

In the given example, it turns out that the mortgage refinance would be the better option. But while this option will give him a lower monthly payment, he will be paying more if he decides to refinance his mortgage because he will be doing so for 30 years.

Home equity loans, on the other hand, are paid off over a shorter period than mortgages. That means the monthly mortgage payments will be increased

Are There Other Alternatives to Mortgage Refinance

The answer is yes. A home equity line of credit deals with revolving credit, which means a person can pay off the home repairs and borrow against the line again without having to take out another loan.

Given that the interest on personal loans isn't tax deductible while the the interest expense on a mortgage or home equity loan typically is, using a revolving credit line can save you money.

tax deductible you can save money by using the revolving credit line.

Of course, that person will then have to have the financial discipline to make monthly payments without fail. If not, expect a payment that will balloon when the loan comes to an end.

So while there is no clear answer to figuring out the best way to pay for home repairs, keep in mind that you always have the option to refinance your mortgage.