Our 100-year-old home has foundation issues. How can we pay for repairs?

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The Credible Money Coach explains how a cash-out refinance can help homeowner pay for much-needed home repairs. (Credible)

Dear Credible Money Coach,

Our home has some dire needs for renovation. The foundation has shifted and caused numerous cracks in the walls and ceiling. The house is approximately 100 years old. We’ve lived in it for almost 34 years and have completed multiple renovations. But with Covid hitting and inflation on the rise, which path do you suggest for us to finance this massive foundation-shifting renovation? — Julie

Hi Julie, and thank you for your question. I’m sorry to hear about your home’s issues. It sounds like you’re wisely exploring options to protect it from further damage. 

The length of time you’ve lived in your home makes me think you may have paid it off or are close to eliminating a mortgage. Even if you refinanced the mortgage, you likely have significant home equity.

I typically caution against using home equity when you can avoid it. However, funding much-needed repairs is a good reason for a cash-out refinance. If you want to learn more about refinancing, Credible can help you compare rates from multiple lenders.

How cash-out refinancing works

When you refinance, you get a new home loan to pay off an existing mortgage. It’s a wise financial move when you can get a lower interest rate to reduce your total interest expenses. You can also refinance for a longer term to reduce your monthly payments.

With a cash-out refinance, your new loan amount is larger than your mortgage balance, so you receive the difference in cash. You can use it for any purpose you like, including home repairs or improvements.

How much cash can you get?

Most lenders limit the amount you can borrow based on a percentage of your home’s value, such as 80%. For example, if your home is worth $250,000, your maximum allowable loan could be $200,000. 

But if you have an existing mortgage, its balance affects how much you can cash out. For example, if your current mortgage balance is $170,000, the maximum cash-out refinance would be $30,000 ($200,000 - $170,000 = $30,000).

Note that if you have a VA loan, you may be able to borrow up to 100% of your home’s value. 

Advantages and disadvantages of refinancing

If you decide to repair your home, a cash-out refinance may be the best option. Some advantages include:

  • Borrowing more compared with a personal loan.
  • Spreading the cost of repairs over multiple years, reducing the monthly payments.
  • Getting a lower interest rate than with personal loans or credit cards.

The potential drawbacks include:

  • Paying closing costs (which could be about 5% of the new loan amount).
  • Meeting a lender’s credit score, income, and debt-to-income ratio requirements.
  • Risking foreclosure if you can’t make the payments.

If you decide a cash-out refinance isn’t right for you, explore a home equity line of credit (HELOC) or loan to tap your home equity. Credible is a good resource for comparing mortgage refinance rates from multiple lenders without affecting your credit scores.

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About the author: Laura Adams is a personal finance and small business expert, award-winning author, and host of Money Girl, a top-rated weekly audio podcast and blog. She’s frequently quoted in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her speaking, spokesperson, and advocacy work. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.