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How to Use a Cash-Out Refinance to Pay for Your Home Remodel

May 18th, 2023 | 3 min read

By Michael Flory

how to use a cash out refinance to pay for your home remodel custom built design and remodeling

Does your home require much-needed work or updating, but you’re unsure of how to pay for it? This is a common concern many homeowners have when they’re planning a remodeling project. 

A financing option that might be viable for you is a cash-out refinance. This uses the built-up equity in your home’s mortgage to give you access to cash that you can use to purchase goods and services, such as a home remodel.

Custom Built Design & Remodeling has 15+ years of experience in the industry. We know how important it is to explore your financing options so that remodeling your home won’t put undue strain on your financial position.

In this article, you’ll learn what a cash-out refinance is, how to use one for your remodel, and if it is the right financing option for you.

What is a cash-out refinance?

A cash-out refinance replaces your home’s existing mortgage with a larger one, giving you access to cash based on the difference between the two.

This cash amount is determined by the amount of equity you’ve built up in your home.

For example, let's say your home is worth $400,000 and you still owe $200,000 on your mortgage. This means you have $200,000 worth of equity in your home

If you refinance your mortgage to get access to the equity you’ve built up, you could use a portion of this on home projects such as remodeling your kitchen or building a deck.

Typically, lenders require you to maintain at least 20% equity in your home after a cash-out refinance. Using our example above, you’d need to maintain $80,000 in built-up home equity, and be able to borrow up to $120,000 in cash.

Let’s say the remodel you’re planning will cost $30,000. You do not need access to all of the available $120,000. Your new mortgage amount will be $230,000:  the amount you still owe plus the amount you want to cash out. 

Typically, any new mortgage will have a different interest rate than one prior. Your rate will depend on factors including federal rates and your credit score. 

How to use a cash-out refinance for your home remodel

1. Know the amount of money needed to complete your remodel

Knowing how much your remodel costs is the first crucial step to obtaining a cash-out refinance. You don’t want to take out any more cash than necessary from your refinanced mortgage.

At Custom Built, you’ll receive the proposed budget range for your remodel at your showroom consultation. Before this meeting, we’ll have gathered enough details about your project and home to develop an accurate price range for your remodel.

You can use the proposed budget range received at your showroom consultation to apply for your cash-out refinance.

2. Know the amount of equity built up in your home

The typical minimum amount of home equity that can be approved for a cash-out refinance is 21%. This is because lenders require you to maintain 20% equity in your home after the cash-out.

If you haven’t built up over 20% equity in your home for a cash-out refinance, this may not be a viable option for you.

3. Apply for your cash-out refinance

There are a variety of lenders who offer a cash-out refinance of your mortgage. Each lender has different policies on the:

  • Requirements to be approved
  • Interest rates based on your credit 
  • Repayment amounts of your new mortgage 

4. Use the cash from your refinance to pay for your remodel

Now that your equity is money in your hand, you can use that to pay for your home remodeling project. 

A benefit of getting the price for your project before applying for your cash-out refinance is that you only take out the money you need. This avoids having you pay additional interest on the funds you don’t need access to.

Next steps for getting approved for a cash-out refinance

If you are looking for a method to pay for your upcoming remodeling project, using the built-up equity in your home may be a viable option. 

By tapping into your equity, you can get the home remodel of your dreams without having to take out a separate loan or rack up credit card debt.

There are resources online to compare lenders who offer cash-out refinances. Conduct research on the different lenders to find the one that works best for you and your build.

As a design and remodeling company with 15+ years of experience, we understand how important it is to find the right way to finance your project. While that can be challenging, we’ve shared our expertise in this article to help you to decide if a cash-out refinance may be a good fit for you.

To learn more about our remodeling services, reach out to our team of remodeling experts. We’d be happy to discuss the details of your project with you. 

To learn more about financing your remodeling project, read the following articles:

*The information provided in this article is for informational purposes only and should not be considered official financial advice. It's always best to consult with a financial advisor or professional before making any financial decisions.*

Michael Flory

Michael brings over 2 decades of building and remodeling experience to his position as the Owner and Visionary of Custom Built. Michael’s passion to make an impact on the home building industry has led him to serve for over ten years at the local and state Home Builders Association, culminating as President of the HBA of Michigan in 2020.