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When you step foot in an old structure or a dwelling where the decor is several decades behind the times, it’s fairly easy to see potential everywhere. A fresh coat of paint, new floors, and a freshly renovated kitchen and bathroom dance before your eyes as you imagine what could be.
But then reality sets in. The cost of remodeling — especially considerable home projects — can be significant. Fortunately, if you’re concerned about the potential cost of improving the home of your dreams, there’s a simple option that can make the entire process easier: a home equity loan.
What Is a Home Equity Loan?
A home equity loan is a sum of money borrowed from a financial institution that uses your home equity as collateral. In other words, it consists of borrowing money from the bank and using your home equity as security if you can’t pay it back.
For instance, if Charlie has $15,000 in equity on his house (i.e. there’s a $15,000 difference between the mortgage and the value of the home), he could apply for a home equity loan. The bank would likely approve a portion of the total, giving him $12,000 or $13,000 in a lump sum that must be paid back in installments.
Another common option is a home equity line of credit (HELOC). This is very similar to a home equity loan, except rather than a lump sum, the borrower is allowed to borrow up to a certain figure. This means they will only pay interest on the money that is actually borrowed from the line of credit rather than borrowing the entire sum all at once.
The Benefits of Using a Home Equity Loan for Remodeling
Many benefits come with opting for a home equity loan for a remodel:
You Can Borrow Money Safely
Rather than other personal loans that unrestrictedly add to your debt, you can rest in the knowledge that, in a worst-case scenario, a home equity loan can be paid off with your home equity. While this obviously isn’t ideal, it’s better than owing a debt that can’t be repaid in an emergency.You Can Get Lower Interest Rates
Due to having your home as collateral, a home equity loan often comes with a lower interest rate. This can lead to significant savings when you’re dealing with large sums of money over long periods of time.
You Increase the Value of Your Home
When you use your equity to finance your home improvement projects, you ultimately boost the value of your home. This can indirectly cover the cost of the loan in the process.You Get a Tax Break
Interest paid on a home equity loan can be written off on your taxes. While that doesn’t change the fact that you’re, you know, paying interest, it does help to know that you can cover some of that cost by writing it off on your taxes.Tips for Using a Home Equity Loan
While there are many benefits to using a home equity loan for home improvements, there are several important things that you want to keep in mind if you choose to do so.Carefully Consider the Costs
If you have a home equity loan it means, like your mortgage, if you’re unable to make a payment, the bank could repossess your home. If you have bad credit or a poor payment history, a home equity loan can be a great way to consolidate your debt and fund a project — but make doubly sure that you can handle the payments before you commit to the loan.Improve the Functionality of Your Home
Before you go replacing perfectly fine cabinets in the kitchen or ripping up a quality rug because you don’t like the color, remember that you’re using borrowed money. Try to funnel your home equity funds toward projects like insulating the basement or replacing a worn-out roof. These will improve the value and efficiency of your home, helping you recoup some of the costs down the road.Use the Loan to Increase the Sellability of Your Home
The other option is to use the borrowed cash to improve the appearance of your home. You can paint over tacky colors, replace dated light fixtures, or even properly grade your landscaping to prevent erosion and improve curb appeal. While these won’t necessarily get you more money, these projects can help you sell your house more quickly when the time comes.Always Keep the Loan in Your Financial Calculations
Remember, a home equity loan may be secured by your assets, but it’s still borrowed money. If you want to get the most money for your house in the future, you’re going to want to have the loan fully paid off before you go to sell.Utilizing Home Equity in Home Remodeling
Home equity loans and lines of credit are excellent ways to remodel your house. They provide a safe and accessible way to get the cash required to update or make changes to your home. However, there are also many concerns that should be taken into consideration if you choose to use a home equity loan.So start crunching numbers and consider the value of the projects that you want to take on. If the venture makes sense, then contact your local lender and start the application process as soon as possible, and before you know it, you’ll have your construction projects underway.
