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How to Use a Cash-Out Refinance for Home Improvements

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If the value of your home is greater than what you owe on your mortgage, you might be eligible for what is known as a cash-out refinance. A cash-out refinance is a loan that replaces your current mortgage with a new, larger loan. The difference between the old loan and the new one (minus fees and costs) will be yours to spend. It’s a way to potentially turn a portion of your home’s equity into cash you can use now.

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Of course, there are pros and cons to applying for a cash-out refinance. There are also good and bad reasons to tap into your home equity. Using a cash-out refi for home improvements that could add value to your home is arguably a good reason, depending upon your specific situation.

Advantages of cash-out refi for home improvements

Let’s start with a look at some of the advantages to using a cash-out refi to pay for home improvements.

  • A cash-out refinance might lower your mortgage interest rate.Perhaps the biggest potential advantage of the cash-out refi is the fact that you might be able qualify for a lower interest rate on your new loan. This is especially true if interest rates have gone down since you took out your current mortgage. If your credit rating has improved since you took out your current mortgage, your odds of securing a lower interest rate may be higher as well.You should also consider the potential downside.You should weigh the fact that not every refinance automatically results in a lower interest rate — there’s a chance you might pay more for your new loan — and even if your rate is lower, your new loan will likely extend the number of years you carry a mortgage.

    Tendayi Kapfidze, chief economist with LendingTree, which owns MagnifyMoney, recommends that homeowners exercise caution before deciding to refinance. “With a cash-out refi, you might end up with a higher rate than your previous loan due to rates trending upward. That could be somewhat disadvantageous.”

  • A cash-out refinance can help you roll debt into a single loan.If you’ve decided to borrow money to pay for expensive home repairs or home improvements, a cash-out refinance offers you the opportunity to simplify your debt. Instead of taking out a separate loan or paying for those costs on a credit card, you can roll all of your debt into a single loan.
  • A cash-out refinance may offer more freedom in how you can use borrowed funds.When you take advantage of a cash-out refinance loan, the extra money you borrow is often yours to use as you see fit. If you want to use $30,000 to update your kitchen and apply the remaining $5,000 toward paying off your credit card debt, that’s your prerogative.By comparison, using other types of loan products to finance home improvements may involve a bit more red tape from your lender. Some loans may require to you use the funds strictly on an approved home improvement project.
  • A cash-out refinance may be tax-deductible.
    New tax reform laws passed in 2018 put more restrictions on mortgage interest tax deductions. However, the good news is that if you use your cash-out refinance to substantially improve your primary home, the IRS might still allow you to take a deduction on the extra interest fee you incur from your increased mortgage. Naturally, as with any tax-related questions, it’s best to consult a certified tax expert with your questions.

Of course, you shouldn’t consider the advantages of a cash-out refi without weighing the disadvantages as well.

Kapfidze made an important point that homeowners should remember: “Keep in mind, you’re reducing the equity in the home when you take out a cash-out refi. Your house is collateral as well. Make sure you can meet that monthly payment or you might be putting your house at risk.”

Cash-out refi vs home improvement loan with no equity

Despite numerous advantages, a cash-out refinance isn’t the perfect fit for everyone and every situation. Even if you’re basically sold on the idea of a cash-out refi, it’s smart to compare alternative financing options before you make a final decision.

LendingTree’s Kapfidze pointed out one reason why a cash-out refinance might not work for some borrowers — lack of equity. “You need to have equity in the house in order to take cash out.”

If your home doesn’t have enough equity built up for you to access, you may need to find a different way to finance your home improvement project. A home improvement loan with no equity is a common alternative.

Here are a few facts about home improvement loans with no equity that may help you make a more informed decision.

  • These types of loans come in several different varieties, including
    • Unsecured personal loans
    • 401(k) loans
    • Government-insured renovation loans (e.g., Title 1 loans, FHA 203(k) loans, etc.)
  • Home improvement loans with no equity may have stricter limitations on the maximum amount you can borrow. If the money you need to finance your home renovations exceeds the maximum amount you can borrow, this type of loan might not meet your needs.
  • When you use something other than a cash-out refi loan, lenders may place more restrictions on how you are allowed to spend the money you borrow. With government-insured loans like the Title 1 loan, for example, you can’t use the funds to pay for anything considered a “luxury item,” such as a swimming pool or outdoor fireplace.
  • If you use a personal loan to finance your home improvement project, it might cost you. Personal loans often feature higher interest rates than cash-out refinance loans. Higher loan costs, if applicable, should always be factored into your decision.
  • Using a 401(k) loan to finance home repairs or upgrades can be a cost-effective choice like the cash-out refi. However, the risk is also high because you’re borrowing from your own personal retirement savings. Plus, you might also be subject to tax penalties if you fail to pay the loan back according to the terms of your agreement.

Home repairs and maintenance

When you think “home improvement loan,” replacing a busted hot-water heater might not be the first thing that comes to mind. However, unexpected home repairs and maintenance can be costly as well.

Many homeowners do not have sufficient emergency funds tucked away to pay for big-ticket repairs. Even smaller maintenance tasks can become pricey when several pile up at once. If you find yourself in either of these situations, a cash-out refinance might be worth contemplating.

Here are just a few examples of common home repairs and maintenance costs where funds from a cash-out refi could solve a big problem:

  • HVAC replacement
  • Roof replacement or repair
  • New windows
  • Well or septic repair
  • New hot-water heater
  • Gutter maintenance
  • Paint or siding maintenance
  • Chimney cleaning or repair

Before you decide to borrow, remember that your homeowners insurance policy might cover certain damage repairs as well. It’s a good idea to check with your insurance provider to see if you can file a claim to cover some or all of the damage before you begin researching financing choices or tapping into your savings.

Renovations

Using a loan, cash-out refinance or otherwise, to renovate your home can be a smart decision if the project adds value to your home. If you spend $25,000 but gain $35,000 in equity, the extra money borrowed is probably a good investment.

However, not every home improvement project is a great idea. Before you pull the trigger on an expensive upgrade, it’s wise to do some research first. Just because you enjoy a home upgrade personally doesn’t mean that it will add value to you home.

According to a remodeling impact study by the National Association of Realtors, here are the top six renovations likely to add value to your home:

  • Complete kitchen renovation
  • Kitchen upgrade
  • Bathroom renovation
  • New roofing
  • New vinyl windows
  • New garage door

Remember, the best way to finance home improvements and repairs is typically with cash. As a homeowner, it’s important to save for inevitable maintenance and improvement costs. Yet when you’re not prepared to pay in cash, the benefits of improving your home now versus waiting can sometimes make taking out a loan a wise decision.

Every loan comes with benefits and risks. If you plan to borrow for a home improvement project, take time to list out the pros and cons associated with each loan product you are considering. Doing so will make it easier to weigh the choices against each other and choose the option that is truly best for your specific situation.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

How to Recover From Missed Mortgage Payments

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

What Is the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.