Home renovations can be motivated by several factors, including enhanced comfortability, better utilization of space and a higher home value. If you’re planning a home improvement project, your home equity may be used as a tool to help you achieve your goal. Consider the key benefits and distinctions of home equity loans, home equity lines of credit, renovation loans, cash out refinancing, and personal loans.
Home Improvement Projects on the Rise
Home improvement projects are on the rise. According to a survey by Porch.com, more than three-quarters of all U.S. homeowners said they had done some type of home improvement project since the start of the Covid-19 pandemic. Nearly 80% of participants planned to undertake at least one home improvement project in the next 12 months.
Beyond the typical motivations for home improvement projects, like comfortability and adding to a home’s value, the pandemic has caused homeowners to evaluate their current living spaces to align with significant lifestyle changes. COVID-19 has disrupted almost every facet of life, including the way we work, learn and play. So, it makes sense that homeowners have been prompted to take an honest look at their homes and assess whether the living space meets their current needs. What were once seasonal adaptations due to stay-at-home orders and remote work situations are becoming more permanent solutions as homes become workplaces, schools and even “staycation” retreats.
The tight housing market and high home prices have also prompted homeowners to stay put and get creative with the spaces they already own. Pairing this sellers’ market with historically low interest rates is a compelling reason for some homeowners to consider financing home remodeling projects versus buying a new home.
If you’ve been dreaming of a home remodeling project, now might be the right time. Jill Haupt, SVP, Private Banking Sales Manager, shares the benefits of investing in your current home and various options based on your personal situation and goals.
Invest in your most valuable asset
Your home is likely your most valuable asset. In addition to making your home more comfortable during this unique season, improving your home can be a wise long-term investment. By making strategic improvements to your home, you can invest in your ability to retain and grow the value of your home if you plan to sell in the future.
Use the equity in your home
Tapping into your home’s equity can be an effective way to fund home improvement projects. Once you understand your project goals, it’s important to discuss with your advisor to determine which option is right for you.
Home Equity Loan
What is it?
A home equity loan is secured against the equity in your home. Paid out in a lump sum, a borrower repays the loan through a fixed monthly payment at a fixed interest rate.
Consider a home equity loan if you need a large sum of money upfront to pay for a home improvement project. This can be a suitable option if you have a specific project with an estimated cost in mind. You may choose to use a home equity loan for a large project like a kitchen renovation or a significant addition to your home.
Due to the current low rate environment, home equity loans may be an attractive option. Fixed payments offer predictability, enabling borrowers to keep financial goals on track with easy monthly budgeting. Home equity loans also allow homeowners to rebuild the equity in their home as they make loans payments. Additionally, there may be tax benefits for some borrowers, depending on the type of improvement that is made.
Home Equity Line of Credit (HELOC)
What is it?
A HELOC is also secured by the equity in your home. Similar to a credit card, it allows you to borrow from a line of credit – just as much as you need, when you need it. The interest rate is variable, meaning interest can fluctuate from month to month, and is charged only on what you borrow.
Consider a HELOC if you are planning a project that will span a significant amount of time, and you are unsure of exactly how much money you’ll need for the project. A HELOC may make sense for smaller-scale projects over a long period. Whether working on a DIY project or with a contractor, HELOCS offer flexibility to draw money when you need it. Keep in mind that a HELOC offers less predictability for monthly budgeting due to variable interest rates.
Like home equity loans, you can replenish your available line of credit and the equity in your home as you pay down the balance. During the draw period, a borrower is required to only pay back interest, initially resulting in lower monthly payments.
What is it?
A renovation loan factors the future value of the home into the loan amount. It may be appropriate for large remodeling projects, like a bathroom remodel or transforming a home into an open concept living space.
You must work with a contractor on the project to qualify for this type of financing. Additionally, the project must add value in excess of the cost of improvements. A renovation loan is often used by borrowers who purchase a “fixer upper” and intend to renovate.
A renovation loan enables you to borrow based on the projected value of the home updates. As with home equity loans and HELOCs, you have the opportunity to build more equity in your home.
Cash Out Refinance
What is it?
Using the equity you’ve built in your home, cash-out refinancing replaces your current mortgage with a single loan for all of your borrowing needs. It is essentially a loan that is higher than the current amount you owe on your mortgage, with the difference being paid out to you in cash.
In order to qualify for a cash-out refinance, you must have a certain percentage of equity in your home. Cash-out refinancing will result in a new monthly payment and interest rate.
Due to the current low interest rate environment, cash-out refinances may offer a lower interest rate than your first mortgage if you originally financed your home at a higher interest rate. As with the options above, cash-out refinancing can be a tool to build even more equity in your home.
What is it?
There are two main types of personal loans – secured and unsecured. A secured loan enables you to use collateral besides your home to finance, such as a car, boat or an RV. An unsecured personal loan is not secured by any item of value, such as a credit card or student loan.
Borrowers may choose a personal loan for short-term, smaller financing needs. Keep in mind that personal loans generally have higher interest rates than home equity financing options.
If you are interested in improving the value of your home, but don’t yet have a substantial amount of home equity, a personal loan can be a great alternative. It may also be helpful for someone who is looking to pay off debt sooner rather than later, as it will likely have a quicker payback period.
How can we help?
Advisors at Johnson Financial Group are here to help. We understand that everyone’s situation and needs are unique. A conversation with your advisor is critical to understanding your options. Contact an advisor today.