Posted on Aug 24, 2020
If you’re a homeowner, you likely have some equity built up in your house. Equity is the difference between the market value of your home (or property) and the amount you owe on your mortgage. Equity increases when the value of your home goes up or as you make more payments.
The benefit of home equity is you can put it to work for you when you need it. One of the most common uses is for financing renovations and upgrades.
The pros and cons of using home equity for remodeling and renovations
Because home equity depends on the current value of your home, using your equity to increase the resale value can be a smart decision that provides a strong return on investment (ROI).
But keep in mind not all home improvement projects that add to your quality of life increase your resale value.
If your goal is to eventually sell your home for a profit, you’ll want to maximize the resale value compared to project costs. Carefully budget your project and talk to a real estate expert in your area about what will have a return on investment.
If your goal is to make your home more enjoyable or functional, you may be more flexible with your projects and expectations.
Many people use their home equity to finance:
- Adding bedrooms or bathrooms
- Finishing an attic or basement
- Creating an outdoor space
- Landscaping and curb appeal enhancements
- Kitchen and bathroom remodels
- Remodeling an office
- Creating a space that will generate rental income
- Energy efficiency upgrades
Choose the right loan type
Once you’ve determined your project, and that you want to use your home equity for financing, it’s time to think about your loan. There are two main types: Home Equity Loans and Home Equity Lines of Credit (HELOC).
A Home Equity Loan functions like a traditional loan. You borrow everything you need up front and start making payments immediately. These loans are fixed rate, which means your payments will stay the same for the life of the loan.
HELOCs function more like a credit card. You are approved for a maximum limit and can borrow what you need over time. There is a borrowing period and a repayment period. HELOCs are variable rate which means your monthly payments can change over time.
Both Home Equity Loans and HELOCs are useful for remodeling and renovation projects. Home Equity Loans are great when you know the full cost of your project upfront. HELOCs are useful if you need more flexibility or are planning an extensive project that will take more time to complete.
You deserve to be well informed about all your financial decisions. When it comes to using your home equity to finance your projects, we know you may have questions and we’re here for you.