The goal of homeownership isn’t always an easy one to achieve. But when you do become a homeowner with a mortgage, you can then use that achievement to realize other objectives. Let’s look at a few ways that refinancing can help you to utilize the equity you have in your home as a tool to reach a variety of financial goals. 

Investing as a Goal 

For a huge number of Americans — almost one in five based on a recent survey — investing is their top financial goal. And this objective is nearly equal across different age demographics, with Generation X, millennials, and Generation Z all showing similar desires to invest more. Baby boomers lag just behind them with about 15% of people in that age group looking to make more investments.  
 

Cash-out refinancing may be one of the best ways you can use the equity you have in your home to help you invest. With this strategy, you would replace the mortgage you currently have with a larger one, and, as the product’s name suggests, take out the difference in cash. You can then use that money to fund a host of different investments. The key here is to invest in something stable that has a rate of return that’s higher than the rate you are paying on the funds you took out through refinancing.  

Stocks can be one way to do this. While subject to market forces and not 100% guaranteed to be profitable, historically, the stock market offers an average return of 10%. As a hypothetical, if one is paying 5% interest on the cash they use to invest, and that investment is returning at 10%, they’re making a steady profit. Granted, the rate of inflation will reduce those profits, and stock values fluctuate, so the stock market is a long-term strategy best managed with the help of financial professionals who know what they are doing.  

And you might consider that the money you may gain isn’t limited to what the investment earns; given today’s attractive interest rates, you could very well get a better rate on your current mortgage through refinancing and lower your monthly payments. 

Refinancing and Real Estate Investing 

One of the most direct ways to employ cash-out refinancing to invest in real estate is to use the money you get to put a down payment on an investment property. This could be a considerable amount, as cash-out refinancing allows for borrowers to get up to 80% of the equity they have in their homes — with low credit score requirements, as low as 640. Some borrowers could very well have enough equity in their homes to buy an investment property outright with cash.  

Also, keep in mind that refinancing works for the second property as well if, like many, you use a mortgage loan to buy an investment property. Just as you can with your primary residence, you can use refinancing to change the mortgage terms on an investment property. One might wish to refinance from a mortgage with an adjustable rate to a fixed one. Or shorten the term of a loan to own a property sooner, paying higher monthly payments but accruing less overall interest. You might also use cash-out refinancing with the mortgage you have for an investment property to pay for maintenance and repairs on that property. 

Paying Down Debt 

Recent data shows that paying down debt is the number-one financial goal of people in the United States, as about 20% of Americans are looking to reduce what they owe. You may be able to simply achieve this goal by using the money you save in monthly payments by refinancing at a lower rate and putting that difference toward debt each month. Though one can also use cash-out refinancing to pay off debt by consolidating high-interest debt with a lower-interest loan. Credit card debt, for example, tends to have a higher interest rate than mortgage rates. 

Home Improvement as a Financial Strategy 

Repairing or upgrading your home isn’t just a goal that could improve your living situation in the short term — it’s also a long-term financial goal. Several home improvements offer significant returns on investments by increasing property values. While not all home upgrades pay off, many do. These often include kitchen updates, replacement entry doors, energy-efficient windows, wood decks, and new garage doors. In terms of cost versus value, Remodeling magazine found that adding stone veneer to a home’s exterior recoups 95.6% of its cost when a property sells. These improvements, paid for through refinancing, could earn you money in the long run. 
 

To utilize refinancing to pay for some or all of these upgrades, you can look to an FHA 203k Rehabilitation Loan. Backed by the Federal Housing Authority, these versatile loans can be used for basic upgrades such as a revamped kitchen or a bathroom makeover, or extensive projects such as additions or even tearing structures down to their foundations to rebuild. It’s a simple deal: you just roll the renovation costs into your current monthly mortgage payment. All with credit-score requirements as low as 580, no tax returns are needed, and you don’t have to currently hold an FHA mortgage to take advantage of FHA refinancing. 

More Money for Retirement 
 

One way to use refinancing with retirement goals in mind is to shorten the term of your mortgage so that you pay off a home sooner and retire with less debt. Entering retirement with a home paid off offers peace of mind that goes beyond pure financial stability. But others use a different strategy: using cash-out refinancing to invest in their retirement savings by contributing to a 401(k) or an IRA. This might make sense if the return on the investment is higher than the interest rate on the home loan.  

Are you ready to take proactive steps to secure your financial future? If so, City Lending is waiting with a range of loan products designed to help you achieve your financial goals. Contact us today. 

Do you have a home that could use some serious updates? And maybe you don’t have the cash on hand to pay for these renovations out of pocket. If so, FHA 203k refinancing may be the solution you seek.

How does 203k refinancing work?

Even if the mortgage you currently have isn’t an FHA loan, you can still take advantage of refinancing that’s backed by the Federal Housing Administration. With an FHA 203k loan, you can borrow money to cover renovation costs and roll that sum into the monthly payments of your existing mortgage. A move may makes sense given today’s low interest rates. These 203k refinance loans often have low down payments (3.5% is the minimum) and low credit score requirements. Add in competitive interest rates compared to many other types of loans and you’ve got a great option to give your home a much-needed upgrade.

The Two Flavors of 203K Refinancing

There are two options with FHA 203k refinancing: Limited 203k loans and Standard 203k loans. Overall, they’re similar but do have key differences.

• A Limited 203k has no minimum dollar amount and is capped at $35,000, while a Standard loan has no upper limit, but a minimum loan amount of $5,000.
• Limited 203k loans are for smaller projects and can’t be used for major structural upgrades; Standard 203k loans are meant for major renovations.
• Limited loans have more flexibility in choosing contractors, while Standard 203k loans require licensed contractors.
• Projects under $15,000 don’t require inspections with Limited loans, while all work with Standard 203k refinancing, no matter the cost, requires inspections.

Home Improvements With FHA 203Ks

Cash-out isn’t the only option for home improvements; FHA 203K Rehabilitation Loans are designed specifically for this purpose, from upgrades, such as bathroom and kitchen makeovers, to significant reconstruction. And your initial mortgage doesn’t have to be an FHA Loan — anybody can do refinancing using an FHA 203K. There are two types of 203K refinancing: limited and standard.

• Limited 203K refinancing goes as high as $35,000. If projects come in under $15,000, inspections aren’t required. But you can’t do most major structural work with a Limited 203K. For those, you need a Standard 203K.
• Standard 203K refinancing starts with projects that cost $5,000 and is usually for big stuff like replacing plumbing systems or adding on extra rooms.

Are there any requirements that I should know about?

A few. The list of eligible home-improvement projects with 203k loans is long, ranging from plumbing, roofing, and flooring to landscaping, a host of energy-efficient improvements, and more. But luxury upgrades aren’t allowed. So no swimming pools, tennis courts, hot tubs, barbecue pits, and the like. While home offices are fine, you can’t use 203k loans to turn part of your home into a commercial business. 203k loans require FHA mortgage insurance. And there are closing costs with FHA 203k loans, which are about the same amount as one would pay with other refinancing methods.

Most Popular Home Improvements

So you know that your home could use some major upgrades. And have the means to pay for them with 203k refinancing. You’re probably considering big structural stuff such as roofs and plumbing and heating systems, which often top the upgrade lists of many homeowners. Where else might you want to put your refinancing dollars? Here are some top home improvement projects to consider:

• Windows. Replacing old windows with new energy-efficient ones makes financial sense; the U.S. Department of Energy estimates that windows often account for 25% to 30% of heat loss and gain in homes. Beyond upgrades, adding more windows is a popular trend, with homeowners installing skylights, floor-to-ceiling windows, and even replacing entire walls with glass.
• Home offices. Millions of office workers shifted to telecommuting with the onset of the coronavirus pandemic. And many will stay that way, making home offices more important than ever. From converting an existing space, such as a bedroom, to add-on construction, creating a dedicated at-home workspace is a practical idea.
• Flooring. Replacing old worn-out carpets with new ones is a popular home upgrade. And while carpeting remains a top choice for many, other flooring trends are on the rise. Today’s luxury vinyl isn’t like the flimsy stuff from the old days, with modern high-quality vinyl flooring that is nearly indistinguishable from wood, stone, and ceramic. And traditional wood flooring is always a great way to go.
• Disaster preparedness. As weather events related to climate change are increasingly bearing down on homeowners, fortifying homes against Mother Nature has become more common. These upgrades include flood-mitigation measures such as increased drainage and installing flood-proof windows and sea-wall barriers, as well as backup power systems, storm shutters, and more.

Using 203K Loans for Investing

While 203k rehabilitation loans are designed for primary residences, there are some ways they can be used for investment properties. One way is to refinance the mortgage on the home you live in, using the loan to make renovations on that residence. Then, one year after the loan closes, you may move out and rent the home to someone else. With some stipulations. The FHA requires that your move has to be for a legitimate reason, such as the need to relocate for a new job or the very real need for more space with a growing family. In essence, it’s possible if you planned to stay in the home for more than a year, but factors beyond your control changed that plan.

It’s also possible to use 203k loans for purchasing investment properties. Savvy investors may wish to use 203k loans to purchase fixer-uppers with the intention of flipping the properties for profits. However, that’s not feasible; 203k mortgages, whether they are for purchases or for upgrades on existing properties, are restricted for use with primary residences — the borrower must reside at the property. But it is possible, and common, for the owner of a property to live there and utilize the rest of the property as an investment with rental units.

According to FHA rules, a borrower can purchase a multi-family building with two to four units, or a structure that they’ll convert into a similar multi-unit property, using a 203k. On the condition that the borrower lives in one of the units for at least 12 months. After that? Then the borrower is free to move out (again, conditionally) and rent the unit that they once lived in. It’s worth noting that one can’t accumulate investment properties this way, by merely living in each newly acquired multi-family building for a year and moving on. A few exceptions aside, FHA 203k loans are one-at-a-time deals.

Whether it’s desperately needed home repairs or paying for improvements that make your dream home all the more dreamy, City Lending is here to meet your needs with the renovation loan that’s perfect for you.

Scrolling through lists of home features as you shop for a new house can be a dizzying experience. It can be difficult to know which home features you really want, which add value to the home, and which don’t. Let’s look at some things that contribute to a home’s value over time, and ways in which you can add value yourself.

The Features Most Folks Want

• A dedicated laundry room. Turns out, the old saying about airing your dirty laundry in public is true; a separate laundry room is one of the most desired features with home buyers, according to the National Association of Home Builders. People will pay for the privilege of keeping dirty laundry out of their living spaces.
• Three bedrooms. Three is the magic number when it comes to how many bedrooms the majority of home buyers want. Overall, 47% want three, compared to 32% who are looking for four bedrooms or more. Though drilling down on NAHB stats shows that 47% of married couples who have children want a minimum of four bedrooms.
• Open floor plans are highly desirable. So much so that a whopping 85% of home buyers say they want free-flowing space between the dining room and kitchen, while 79% want to have an open space between the family room and the kitchen, and 70% want the same between the family room and the dining room.
• Walk-in pantry. One of the most popular kitchen features with home buyers, walk-in kitchen pantries means more living space and less storage in the kitchen. Lots of people these days buy in bulk at big box stores, and it’s nice to have a place to store all those non-perishables mere feet from the cooking area.
• Two bathrooms are perfect. But not by an overwhelming majority: 37% of homebuyers want two bathrooms; 21% are looking for 2.5; while 26% wish to have more than three baths.
• Full bath on the first floor. According to the National Association of Homebuilders, having a half-bath on the first floor increases an average home’s value by 10%. Which is impressive enough. But that doubles to 20% if it’s a full bathroom: toilet, sink, shower, and tub. From families with young children they can bathe on the main floor to older adults who wish to climb stairs less, nearly everyone loves a full bath on the first level.
• Two-car garage. The majority of prospective home buyers, 42%, want a two-car garage, more than double those that want space for just one car (18%), and those looking for a three-or-more car garage (12%).
• The suburbs win with location. This is clear with the top sought after aspects of prospective areas to buy a home in, which are walkable suburban communities with trails for walking and jogging, close to both parks and ample retail options.

Areas Where You Can Add Value

When looking for a new home, it’s a good idea to keep an eye out for untapped potential, namely areas where improvements will pay off with increased resale value.

• Exterior illumination. This top feature on the NAHB’s list is also one of the cheapest to install. A few hundred dollars can illuminate a home’s exterior in dramatic fashion, with walkway lights, pendant lights, and strategically positioned spotlights. It’s a small investment with an attention-grabbing payoff.
• Upgrades over revamps. While going all-out on a full upscale kitchen remodel may seem like a solid investment, Remodeling magazine’s data shows that kind of large-scale overhaul brings in a 53% return when balancing cost against added value. A more moderate kitchen upgrade brings in an 81% return. The same is true with bathrooms; conservative updates see returns in the 70% range while extensive remodels return 56% on average.
• Ceiling fans. Simple, energy-efficient, and comparatively cheap, ceiling fans are desired by the overwhelming majority (83%) of potential home buyers. Energy.gov says any rooms in which you install ceiling fans should have heights of at least eight feet.
• Energy Efficiency. From energy-efficient replacement windows to Energy Star-certified appliances, most buyers are looking for homes that don’t waste money with utility bills.
• Side-by-side kitchen sink. Most people want a double sink in the kitchen. You can install one for about $500 and have a kitchen feature that more than 80% of homebuyers want.
• Adding usable square footage. Square footage has a direct impact on home value; bigger homes fetch bigger prices. But beyond additions such as second stories, consider making existing space more livable. Building a deck or finishing a basement are two of the best ways to create more usable space. Patios and front porches are two of the most wanted outdoor features for buyers, according to the NAHB.

And if you’re wondering how to pay for these value-adding improvements, home refinancing may be the perfect way to use the equity you already have in your home to get the cash you need for home improvements.

And some things that may not add value…

There are some common misconceptions about things folks think add value to homes, but actually don’t.

• Swimming pools top the list; while pools can increase the value of a home by up to 7%, they also come with maintenance costs (and upkeep hassles) some potential buyers won’t want.
• Overbuilding, such as a second story in an area of one-story homes, won’t considerably boost the resale value if the home goes beyond the neighborhood norm.
• High-end upgrades are great — if they’re consistent throughout the house. A sleek new kitchen won’t move the needle on the resale price very much if that’s the home’s only major renovation.
• Wall-to-wall carpeting. Processed with chemicals and known to trap allergens — not to mention the cleaning issues — carpeting can be a turnoff to would-be buyers. Best to tear out the carpeting and put in wood flooring.

Ultimately, the features you want in your new home, and those you wish to add, are matters of personal choice. When you do find the home you desire, City Lending is here for your mortgage needs from purchase to home improvements.