If you are a homeowner looking to increase the value of your home, you may consider diving into the world of renovations and repairs.
As you go from room to room, assessing the need to replace outdated fixtures, aging electrical, and damaged flooring, you begin to keep a running tally of costs in your head. You quickly realize the mounting costs associated with taking on a home renovation project are no small matter and wonder where the money to pay for upgrades and repairs will be found.
Home equity lines of credit (HELOCs) offer a solution for homeowners who find themselves in need of funds for home renovation projects. A HELOC is a type of revolving credit line that uses your home as collateral against default. You are given a certain credit limit, based on the equity you have in your home along with other factors like your income, needs, and credit score.
What is Equity?
Equity is determined by taking the home’s current market value and subtracting the amount that you owe on the home. Many lenders will not extend you the full amount of equity that you have in your home, but the percentage typically varies between 75 and 90 percent.
For example, you bought your home in 2010 for $300,000, but it is now worth $340,000. If you currently owe $225,000, then you have $115,000 equity in the home. If your lender will extend a limit of 85% of your equity, then you might be eligible for a HELOC of up to $97,750.
What are the advantages of a HELOC?
One of the biggest benefits of a HELOC compared to other types of loans is the lower interest rates that they offer. Because the loan is secured by your home equity, HELOCs often come with much lower interest rates than unsecured loans such as credit cards or personal loans. HELOCs do come with a variable interest rate, meaning that the rate will fluctuate with market conditions. However, there is typically a cap on how high the rate can go, and the estimated rate range is often lower than most credit cards.
Another advantage of HELOCs is that your interest may be tax-deductible if you use the borrowed funds to pay for home improvement projects on the home that secures the loan. Always consult your tax advisor about potential deductions before making your decision.
I opened my HELOC; now what?
It can cost big bucks to take on a full home remodel. Many homeowners choose to break their remodel into several smaller phases and use a HELOC to pay for the smaller individual projects over time. You can renovate your home throughout the 10-year draw period and borrow money against the line of credit as needed, making minimum monthly payments at the least. Then you will pay back the full value over the next 10 to 20 years, depending on the terms of your HELOC.
Home renovations can increase the value of your property, especially in rooms such as the kitchen and bathroom. However, keep in mind that you will recoup only a portion of the cost. Evaluate market conditions in your location prior to starting a remodel, especially if you plan to sell the home in the near future.
The 2019 Cost vs Value Report lists the following renovations as the best bang for your buck.
- Garage Door Replacement – Replacing an inefficient and worn garage door with a newer insulated door with lifetime warranty can, on average, earn you a 97.5% return on your investment.
- Stone Veneer – Replacing exterior vinyl siding with manufactured stone veneer will, on average, give you a 94.9% return on your investment.
- Minor Kitchen Remodel – Giving your kitchen a few modern updates with new cabinet door fronts and hardware, new energy efficient appliances, and updated counters and flooring can give you, on average, an 80.5% return on investment.
- Siding Replacement – Trading worn and dingy siding for fresh new siding in a neutral color can, on average, earn you a 75.6% return on investment.
- Deck Addition (Wood) – Making your backyard more inviting with a 16 x 20-foot deck can, on average, lead to a 75.6% return on your investment.
In total, these five home improvement projects have an estimated total cost of $64,394. Many people do not have this amount of cash sitting around in their bank accounts for home repairs. Opening a home equity line of credit is one great option to help homeowners fund these individual projects over a span of several months or years while keeping interest payments low.