4 Easy Steps to Using Your Home Equity for Remodeling
If you have good credit and enough home equity, your current home’s equity may be a low-cost means to finance a fun home remodeling project. Remodeling is expensive, and you might not have the cash needed on hand to pay for the improvements that you may want to make. Maybe you have some cash but want to leave it in your savings as a cushion for an emergency. This article will discuss all you need to know about borrowing against your equity to pay for your home improvements.
Continue to read to find out the four steps to using your home equity for remodeling.
Can You Use a Home Equity Loan for a Remodel?
A home equity loan can be used to remodel your home, and the best part is these types of loans don’t typically come with spending restrictions. Home improvement projects are one of the best ways to use a home equity loan; they don’t always improve your home’s resale value by the cost of the project, they can add functionality and be aesthetically pleasing where you spend all of your time.
How Can You Use Home Equity During a Remodel?
There are four key methods for using your home equity to remodel. One or another can be more appealing to you than the others, of course, depending on your financial circumstances, remodeling plans, and risk tolerance. Below are the four methods that will help you figure out how to use your home equity for a remodel:
Home Equity Loan
A home equity loan makes it possible to borrow a lump sum at a fixed rate with a payback period of up to 30 years. A risk to keep in mind with any form of home equity borrowing, namely a home equity loan, is that the loan servicer can foreclose your property because your home is considered collateral. A home equity loan is different than your mortgage, and they will be repaid simultaneously when the loan is repaid.
HELOC (Home Equity Line of Credit)
A home equity line of credit, or HELOC, gives you access to a predetermined amount of home equity you can borrow against if you need to. If you have ongoing expenses, this type of financing option might be a good choice for you. The interest rate is a variable. However, you always have the option to make interest-only payments during the first years of the loan.
Cash-Out Refinance
The best method to tap out your home equity is a cash-out refinance if the existing mortgage is a higher rate than you qualify for. Instead of taking out a second mortgage, you can replace your existing mortgage with a brand-new one that has a lower rate and higher balance. You can settle on a fixed or adjustable-rate loan on a cash-out refinance to get a term as long as 30 years.
Home Equity Agreement
A home equity agreement will afford you access to a lump sum of equity through an arrangement with an investment company. Loan payments don’t have to be made as long as the agreement lasts. When and if the agreement ends, you can always opt to repay the investor in cash, borrow money, or sell your home. The amount owed depends on the home’s change in value and how much equity the investor made advancement for you at the beginning of the initial agreement.
Pros and Cons of Using Home Equity to Remodel
There are plenty of unique considerations for using your home equity to remodel; the risk of using home equity to remodel is very similar to the risk of using it for any other reason.
- Pros
- Not as Costly. Loans that are secured by your home are typically a less expensive means of borrowing money, especially if you are seeking 10 to 30 years of repayment terms.
- Interest Might be Tax Deductible. If your tax deductions are itemized, the interest you pay can be deducted on up to $750k in home equity debt when using the funds to buy, remodel, or build a home.
- Home Value can be Increased. If your home is aesthetically or functionally dated and you are planning on moving, improvements can help your home sell for more money and real estate agents can inform you of what projects are worth spending.
- Borrow Plenty of Money. Home equity is one of your greatest assets, and remodeling can be pricy. If you paid down your first initial mortgage or the value of your home has increased, you can borrow more than you might with alternatives like personal loans.
- Cons
- Foreclosure Risk Increased. With a new financial obligation without any increase in income or a decrease in expenses, your budget can get squeezed. If something unexpected happens, repaying your home equity loan can be challenging. If you stop making payments, the lender may choose the route of foreclosure, depending on the value of the home or if your home’s equity loan is in first or second position.
- Interest is Not Deducted for Taxpayers. Many people have claimed standard deduction since it doubled in recent years, and it might not be wise to itemize deductions.
- Home Value is Unlikely to Increase. Remodeling projects don’t usually increase the value of a home, even upon completion. If the remodeling work becomes outdated, you are less likely to recoup what you spent if you decide to sell.
Conclusion
The home equity loan can be a good choice when you are doing a large project that will be paid for all at once and if you are looking for the certainty of a fixed monthly payment. Some lenders make it possible to enjoy the best of both worlds by offering a fixed-rate option on a home equity line of credit. Trust the professionals at Palm Beach Coastal Realty to guide you in finding and settling into your dream home in the beautiful area of Palm Beach Gardens, FL, today!