Use Your Home Equity to Be More House-wealthy

home on top of money

According to the latest Homeowner Equity Report from CoreLogic released in June this year, Americans with mortgage loans own 62 percent of all properties in the U.S. Between the first quarter of 2020 and the first quarter of 2021, the average homeowner has gained about $33,400 or 19.6 percent in equity. The collective gain in the equity of all American homeowners in that period reached $1.9 trillion. This came from the surging prices of homes in the housing market.

There is further good news if you are a homeowner. According to Fox Business, if you own more than 20 percent equity in your home, then you can borrow from it in several ways and use the money to improve the house, thereby further increasing its value and your wealth.

Types of Loans on Equity

NextAdvisor explains the difference between a home equity loan and a home equity line of credit (HELOC). The Federal Trade Commission allows a home equity loan of up to 85 percent of your current home equity. The amount of your equity determines the actual amount you can borrow. This is a fixed-rate loan that can have terms between five to 30 years. The advantage of the fixed rate is that you know you will be paying the same amount every month over the life of the loan.

Because interest rates are low, you will have low monthly payments. If you have a high credit score, you can get even lower mortgage rates. You will receive your borrowed amount in a lump sum with your house as the collateral. Remember that this loan is different from and on top of your mortgage. Make sure you have enough disposable income every month to be able to pay both.

The HELOC is a revolving line of credit based on a percentage of your equity. Instead of getting a lump sum, you only borrow what you need. You owe interest only on what you borrow, and interest rates are usually variable. This means that you can borrow more as the need arises. Your home is still the collateral, and each borrowing is separate and on top of your existing mortgage.

In both the home equity loan and the HELOC, you can get deductions in interest if the money is for home renovation projects. This is another benefit of using your equity to improve your home.

A third option that can get you money for renovation while maximizing currently low mortgage rates for your main mortgage is cash-out refinancing. In this case, you get a new mortgage that is larger than your current mortgage. It will pay off the balance on your mortgage, and you get the difference as a cash lump sum. This is what you can use for renovation. This means that you only need to make one monthly payment based on low mortgage rates. You can choose to pay the same amount monthly for a longer period because you have a bigger loan amount, or you can choose to pay more monthly for a shorter period.

home rennovations

Not All Renovations Are Profitable

Choose your renovation projects wisely because some are more profitable than others. You must maximize your investment so that it adds the highest potential resale value to the property. According to The Wall Street Journal, a study by researchers from the University of Alabama and the University of Texas at Arlington among 88,980 properties in greater Denver showed that improving a home’s curb appeal adds an average of seven percent to its resale value. When the market is slow and buyers can be pickier, it can add 14 percent to the home price.

This is consistent with the 2021 Cost vs. Value report of Zonda Media, which showed that 11 out of the top 12 renovation projects with the highest cost recouped upon selling were outdoor projects. These included the replacement of the garage door, the addition of a deck in wood or composite that can have a retractable patio awning as an extra attraction, and the replacement of roofing with asphalt shingles. These projects provide a high 93.8 percent return on investment (ROI) for the garage to a low 60.7 percent recouped cost for roof replacement.

Fixr worked with the National Association of Realtors (NAR) 2021 Profile of Home Staging to also show outdoor renovations that boost a home’s value. Exterior repainting, including the front door, and repaving the driveway were recommended by 78 percent of realtors. Front landscaping by a professional lawn care service and adding a front path were recommended by 55 percent.

As you enjoy your newly refurbished home, you must realize that you have made the best kind of investment. You have the added satisfaction of knowing that you have just made yourself wealthier with your value-added property.

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