If you own a home, you have probably thought about fixing it up. Maybe you would like new cabinets in the kitchen, a second bathroom, a family room or a deck. The only thing you need is the money to pay for these projects.
Home equity loans are a logical, reasonable and intelligent way to finance home projects
You could take out a loan from a bank, finance the work done to your house by using your credit card or wait for an inheritance and continue to be frustrated by your lack of space or annoyed with the inconvenience of sharing a single small bathroom. Loans can be enough hassle as it is, but you certainly don't want to have to deal with a high credit card interest rate on top of that.
One possibility that many don't think about is that of using the equity you have built up in your home
. This is called a home equity loan. Home equity loans are a logical, reasonable and intelligent way to finance home projects that will not only benefit you and your family but can almost always create a higher resale value for you when it comes time to move.
A home equity loan allows you to borrow part of the equity you have built up in your home. This can equate to a large sum of money if you have lived in your home a long time. The equity is the amount of money a buyer would pay to purchase your home minus the outstanding debt you carry on it. If your house appraises for $150,000 and your outstanding mortgage is $100,000, then your equity would equal $50,000. Generally, you can acquire a home equity loan for an amount up to 80 percent of your equity, or in this case, $40,000.
When you charge a home improvement project on your credit card or take out a loan at the bank, are you able to get additional benefits from that money above and beyond the actual cash to pay for the work, or do you simply have to return that money to the bank or credit card company, with hefty interest?
You know the answer to that. However, in nearly every case, using a home equity loan instead will provide you with a tax deduction, tax credits or both. That is because mortgage interest is tax deductible, and if the home improvement projects you complete include certain approved energy-saving items, you will qualify for additional tax credits. Before beginning a project, be sure to find out from your tax professional whether your loan and subsequent improvements will be tax deductible or not. They almost always are.
The downside of a home equity loan
Although home equity loans are fairly easy to get and carry a lower interest rate than most regular loans, certainly lower than a credit card's, you shouldn't get one without careful consideration.
Never forget that you are putting your home on the line as collateral for this loan. If something were to happen that prevented you from paying the loan back, you could lose your home. The lender could take it and sell it in order to get back the loan money.
Take out a home equity loan for things that will turn into money for you in the future. Many people rashly use a home equity loan to pay for vacations or some other type of purchase that only offers a short-term benefit. It is unwise to count on your home appreciating enough in value on its own to pay back the equity loan when you sell. The market is always changing. If you end up owing more on your house than it is worth, more than you can get for it if you sell, then you are "upside down" in your loan, just like many people are with their automobiles. Not a good idea.
Carefully calculate the additional monthly payment a home equity loan will cost you before you acquire one. If it can be added onto your mortgage without changing the payment amount, consider whether you want to make mortgage payments for that extra length of time.
Any loan, including a home equity loan, can create serious financial problems. Work out the details before committing yourself.
Types of home improvements that have the highest return value
Updating and improving your home in certain ways can make your home more appealing to a wider range of potential homebuyers. If your intent is to sell and make a profit, this is a very wise move to make. If you have no intention of selling, but want the improvements for your own enjoyment, you can often get a home equity loan that does not raise your monthly mortgage payment. The option of simply increasing the length of your mortgage is possible and is worth discussing with your mortgage lender.
When it comes to home improvements, not everything equates into a higher resale value. Here is a list of things that will return the most money to you when it comes time to sell your home.
The two best projects to consider, in order:
The money you spend fixing up a kitchen is usually returned to you at nearly 100%. This improvement is considered the most important area of the house by many buyers. A buyer will be looking for updated appliances that save energy. They are attracted to a kitchen that is large enough to support entertaining. Clean, white sinks, refrigerators, ovens and other appliances are best. Avoid trendy colors. When thinking of resale value, go neutral. Solid-wood cabinetry and recessed lighting, with task lighting over the stove and sink, are good ideas. New tile flooring can make a big difference.
If such expensive repairs make you uncomfortable, then simply paint and repair damaged items. Simpler renovations can also offer big returns.
Remodeling or adding on a second bathroom is a big money-maker when selling your home, with estimates running from 85 to 90 percent return value. Bathroom and kitchen renovations can be very expensive, so be prepared. If you only have one bathroom, consider adding on a second. Many homebuyers will not entertain the prospect of buying a home with only one bathroom, so adding one will increase your range of potential buyers. Consider installing double sinks (in white), new fixtures and faucets and new flooring, preferably in a clean, neutral tile.
Other potential home improvement investments
Some estimates claim that a second-story house addition can return a profit at selling time, but this is a very expensive remodel. Do not consider it if it will make your home too big or too expensive for your neighborhood.
The same considerations should apply to adding on a family room.
Are your floors ugly or worn? To add value to your home, consider new hardwood floors. Choose light or mid-colored wood, not dark. Hardwood floors are considered timeless and classy, so this is a good investment.
A deck is a less-expensive project that can reap large rewards. Decks create an "outdoor living space" beyond the traditional rooms. The backyard becomes a place to gather, grill and entertain.
Installing a fireplace can add to your home's resale value.
Replacing an old heating and cooling system can instantly add value to your home, especially if the new system is energy-efficient. Remember that by installing certain energy-saving products (including windows and insulation), you can qualify for valuable tax credits.
Would you like to spend less and still increase the value of your home? Consider:
- Ceiling fans
- Fresh paint
- Repairs of cracks in walls and ceilings
- Replacement of worn out doors
- New electrical outlet covers
- New window treatments
- Refinishing a hardwood floor
- General repairs and cleaning
Don't remodel too much for the neighborhood
This is worth mentioning twice. There comes a point in any remodel where you will not get the return you want simply because you have improved your house too much for your neighborhood. If all the houses around you are selling for $100,000 and you have to get $200,000 just to pay off your mortgage and home equity loan, you may have overbuilt.
The input of an appraiser or a real estate agent can be invaluable in such cases. These experts can tell you if the project you want to undertake is a moneymaker. They can tell you what current home buyers want. They can advise you on what the neighborhood will sustain.
Preparing to apply for a home equity loan
Before purchasing those remodeling magazines, make sure your credit score and credit history will not hinder the process.
If your credit score is about 680 or higher, you will probably have no difficulty getting a home equity loan. If it runs less, then get copies of your credit report
and check for errors and inaccuracies. They are not uncommon, and, if they're not eliminated from your report
, can make it hard to get the loan you want. You are entitled to one free copy of your credit report from each of the three reporting agencies, per year, and you can order a copy at www.annualcreditreport.com
If the questionable items on your credit report are valid, take some time to pay off your debts before applying for any loan.
When you are ready for a home equity loan
Compare Home Equity loans for the best rates. Go to our home loan center
It is important to be smart about the loan for which you are applying. Make sure that you fully understand all the facts and details.
Read and understand all the conditions applying to the loan.
Make sure you are told all of the fees, charges, costs and penalties associated with the loan.
Find out the repayment options. You should especially check to see if your loan has a pre-payment penalty.
Make sure you understand the interest rate. Is it adjustable or fixed? What are the variances associated with it?
Finally, as you wait for the contractor to show up
Understand that your renovations may take awhile, so it's important to have a sense of humor and be flexible and open to unexpected delays. Keep in mind how much you will enjoy your improvements once they are finally done.