Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Home Equity For Home Improvement
Everyone has to live somewhere and, everyone has to invest their money in someplace. So what happens when where you live, meets up with where your money is invested?
In this post, we will discuss how to use home equity for home improvements and things to know before using it for remodeling.
For most homeowners, it is a choice between paying cash or borrowing against the home equity that they have build up in their home.
HELOC Or HEL?
Interest rates are still significantly low, and we are not sure how long they are going to stay that way.
And home values are still rising, at least on average. So taking out a home equity line of credit (HELOC) or a Home equity loan (HEL) may seem like a sensible financial move though it is not always the case.
We have explained the difference between the HELOC and HEL in our blog post “Understanding Home Equity Loans In Texas.”
It depends on an individual’s needs to choose between the two. Understanding the difference should help you when you are deciding how to fund your home improvement project.
Know Your Debts Situation
Along with the difference between the HELOC and HEL, you would also want to know some other important questions before you proceed with the home renovation.
First, how many of other debts do you have? If you already owe a lot and especially if your existing debts carry high-interest rates, you may want to reconsider taking on additional debt.
Many home improvements are elective. You may wish to get that beautiful flooring but, you could wait to get that and work on your current debt situation.
You want to get your finances in order before you start any home improvement projects for your home.
Know Your Equity Situation
Then you need to figure out how much equity you have. So if you don’t have at least 20% equity, there are few reasons why you may want to think twice before borrowing against it.
First, you may still be paying private mortgage insurance (PMI). It would be a great idea to reach that 20% threshold and eliminate that payment before starting a remodeling project.
Most lenders want you to have some significant stakes in your home. And they are not going to let you borrow until you have at least 20% home equity.
Although some lenders are maybe a little bit moderate about this number, if home values drop, you will lose a significant amount of equity.
hence you don’t want to borrow against your home so much, that your property ends up being underwater. And lenders don’t want that to happen as it increases their risk as well.
Knowing the Amount and the Worth
Now that you know about your debts and equity situations, you need to pinpoint how much you need to borrow to get the job done if you are somewhere close to getting a mortgage.
Home equity loans have startup costs, appraisal fees, an application fee, credit check fee, closing cost, etc. You want to make sure that the amount that you are borrowing is worth the cost of acquiring it in the beginning.
This is when it becomes critical to analyze the additional fees that would add to the cost of the loan and then avoid them if at all possible.
You also want to figure out how much cash you can deploy for the project. Let us say you have significant equity in your home, but not much money in hand. Getting a HELOC or HEL may not be a bad idea.
Since the interest rates are low, this may be one of the cost-efficient ways to borrow money for the home improvement project.
If you have a lot of cash, healthy emergency savings, and beyond that, you might want to use that cash to fund your remodeling project instead of borrowing from your home equity.
This would be the most efficient way to finance your home renovations.
Knowing How Long You Are Planning To Stay In The Home
The next thing you want to know is how long are you planning to stay in the remodeled house. If you are planning to sell the house shortly after finishing the home renovations, you generally have to pay back the loan in full when you sell.
You want to make sure your home improvement project adds enough value to the house.
So the sale is going to generate enough cash to pay back the loan unless you have some other means to pay it off.
Make sure your strategy of the home renovation project is in sync with your stay in the home to get maximum gains.
Conclusion
In the end, regardless of whether you use cash, HELOC, or HEL, make sure that your enjoyment of the home renovation process and the results make the entire investment worthwhile.
It’s not about how much investment you make in your home remodeling project; it is about how and when you make that investment!
