Using Your Home Equity To Fund Renovations


Home Equity

As house prices steadily rise across the US, so does the home equity available for homeowners to tap. In fact, the average homeowner with a mortgage gained a record-setting $14, 700 in usable equity in this past year, CNBC reports. You can capitalize on this increase in equity with a home equity line of credit (HELOC), which essentially transforms your home’s equity into readily accessible funds. This loan option is particularly popular with homeowners looking to renovate their homes to increase value.

Renovating your home

Investing money into a home renovation is a surefire way to increase its value. Larger homes often command higher prices when time comes to sell. Building a new room is the most obvious way to increase the size of your home, but you can also add useful extra square footage by converting the attic or basement or even building a garden deck. In fact, midrange deck additions recouped an average of 82.8% of the total cost in 2018. While it’s rare to ever recoup 100% of your renovation costs, you’ll still certainly increase your home’s value, make it nicer, and sell it faster.

Financing your renovation with a HELOC 

HELOCs are one of the lowest-cost finance options, particularly compared with short-term loans or credit cards. Think of a HELOC as a credit card where you get a set amount of credit for a certain amount of time — usually upto ten years. During the “draw period”, you can withdraw money as and when you need. With a HELOC, you also have the opportunity to choose between either a fixed or variable interest rate. A fixed-rate loan can end up saving you money as you can pay off the debt at a pace that suits you.

Understanding the risks 

The biggest risk of a HELOC is possibly losing your home if you end up unable to make repayments. A HELOC should be taken out only if you’re disciplined enough to stick to your repayment schedule. If you have a history of overspending and debt, you probably shouldn’t be considering a HELOC. For homeowners aged 62 and over, a reverse mortgage may be a better option. A reverse mortgage converts home equity into cash — either paid as a lump sum, line of credit, or regular payments. It doesn’t need to be paid back until the homeowner passes away or moves out.

If you’re planning to renovate your home, home equity borrowing is one of the cheapest financing options available. Meet with your financial institution to learn about the conditions and benefits of a HELOC. Always consider all your options in order to make the best decision for your situation.

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