Your roof is one of those things you don’t think about often. But when it needs to be replaced, either due to wear and tear over time or a natural disaster, it quickly becomes a top priority. However, roof replacement can be an expensive endeavor and you might find yourself needing to get the work done when you’re ill-prepared to pay for it out of pocket.
The good news is that there are several roof financing options to help you with your project, including home improvement loans and refinancing. Here, we’re going to compare these two options and figure out which one is better.
Home Improvement Loans
A home improvement loan is a personal loan that you can use to finance repair and renovation work on your home. You get a fixed amount of money in one lump sum and begin paying the loan back immediately.
Home improvement loans are typically unsecured, meaning you won’t use your home as collateral. Interest rates on home improvement loans are fixed and usually depend on your credit score and history. Your monthly payment will be the same until your loan is paid off.
Applying for a home improvement loan is easier and similar to applying for a credit card. The lender will need your financial information, personal information, and the details about your desired loan. If your credit score and financial history are sufficient for the lender, your loan amount, interest rate, and terms will be set. The payback period is usually 2 to 5 years.
Pros of a Home Improvement Loan
- Faster Approval Process: Home improvement loan application processing and funding speeds vary, but some lenders are able to deliver the loan into your account in as little as 1-3 days.
- Eliminate the Need for Collateral: Unsecured home improvement loans don’t require collateral for you to get approved. You won’t have to risk losing your home or car if you fail to repay the loan based on the agreed-upon terms with your lender.
- Fixed APR and Monthly Payments: Interest rates and monthly repayments on home improvement loans are fixed over a set number of years. So your interest rate will not change and you’ll know exactly how much you’ll be expected to pay, allowing you to budget accordingly.
- Flexible Borrowing Limits: The borrowing limits for home improvement loans vary by lender, but on average, loan amounts range from $1,000 to $50,000. For this reason, home improvement loans can be sufficient for the roof replacement needs of most homeowners. Just keep in mind that getting a higher amount will depend on your credit score and financial picture.
Cons of a Home Improvement Loan
- Higher interest rates: With shorter repayment terms and no collateral backing the loan, home improvement loans tend to have higher interest rates than other options like refinancing, where your home is used as collateral.
- No tax benefits: You can’t claim a tax deduction on the interest paid if you use a home improvement loan to pay for your roof replacement.
- Creditworthiness is the biggest qualifying factor: Because you’re not using your home as collateral, home improvement loans place more emphasis on your credit score, income, and debt-to-income ratio. You may not qualify for the loan or a higher limit if you have a poor credit score.
Refinancing for Roof Replacement
If you’ve built enough equity in your home, you can opt to refinance your mortgage and pay for your roof replacement. With this option, you replace your mortgage with a new one, while converting some of that equity into cash. Basically, you’re borrowing more than you owe on your mortgage and taking the difference in cash.
This is different from getting a second mortgage. When you refinance, the new loan becomes your primary mortgage.
Let’s look at a cash-out refinance example. Say you bought your home six years ago for $200,000, but it is now valued at $265,000. You’ve paid your mortgage down to $145,000. Since most lenders allow borrowers to borrow about 80% of their home’s value, you could refinance and get a new mortgage of $212,000. If you subtract the remaining loan amount, you could get $67,000 in cash to use towards your roof replacement project.
Other factors such as credit score, income, and other debts may be considered as part of your refinancing application.
Pros of Refinancing
- Lower interest rates: Interest rates on cash-out refinance loans are generally much lower than rates available on home improvement loans. You may even get a cash-out refi with lower interest than you’re paying on your current mortgage.
- Possible tax benefits: Mortgage interest is usually tax-deductible if you itemize your deductions. And the cash you take from your home equity is generally not considered taxable income.
- Opportunity to switch to a shorter term: If you have a 30-year loan, refinancing it to pay for your new roof could allow you to switch your loan to a 15-year term. If you can afford to increase your monthly payments, shortening your loan term could help you to become mortgage-free sooner and save money in interest over the life of the loan.
- Convert to a fixed rate: If your existing loan is an adjustable-rate mortgage (ARM) and you’re past the 3-5 years fixed term, refinancing can put you on a fixed rate. This can protect you from spiking interest rates in the future and allow you to build a balanced budget for your home.
Cons of Refinancing
- Closing costs: Just as with your original mortgage, there are closing costs involved with refinancing, including legal fees, an appraisal, and a loan origination fee. If you don’t have the amount needed, you can roll the closing costs into the mortgage, which will increase the amount you owe or the interest rate.
- Longer break-even point: By extending the life of your mortgage, you’ll push your break-even point further into the future. And since you’ll pay interest for more years, the savings may be minimal.
- Longer approval time: Refinancing your home is not something you can do in a week. Because of the inspection and appraisal process, it could take several weeks to get approved. This may not be convenient if your roof is damaged. Putting off roof replacement as you wait for refinancing approval will expose your house and everything in it to more damage.
Both home improvement loans and refinances offer flexible loan amounts without putting restrictions on the use of the funds. Your choice will depend on the amount you want to borrow, how fast you need to receive the payout, the interest rates, and loan terms.
Roof Replacement Financing Made Easy
StormForce of Jacksonville recognizes that a new roof can be an expensive investment. We’re committed to helping you to find competitive financing options for your roof replacement. We may be able to help even when you have had credit issues in the past. And when you have financing in place, we can ensure you get excellent roof replacement services. Contact us to get a free estimate today.