Homeowners everywhere should understand the ins and outs of utilizing their home’s earned equity to further improve the structure. The equity of a home is equivalent to the difference between the estimated value of the home and what is still owed.
For example, if the home is worth $300,000, but the owner only owes $150,000 on their mortgage loan, then the home has around $150,000 in built up equity. An equity loan simply allows the homeowner to access those funds for the purpose of improving the home.
Due to the beneficial nature of remodeling to equity, it is fairly easy to acquire a home equity loan. Take a moment to look over a few informative points on financing a home remodel project with a home equity loan.
Home equity loan vs home equity line of credit
The similarity between a home equity loan and a home equity line of credit is that both processes borrow money against a homeowner’s property, putting the home itself up as collateral. The main difference between the two types of funding is that a home equity loan is set on fixed payments with a fixed interest rate.
A home equity line of credit is a revolving line of credit with varying interest rates. The payment schedule for a line of credit would be set up a bit different. Also, a home equity loan can be lumped into one, simple monthly mortgage payment, whereas an equity line of credit works more like a traditional credit card.
Home equity and return on investment
All home equity remodeling projects are not created equally in terms of return on investment. An office remodel may greatly enrich the lives of the current homeowners, but it does not add a whole lot of value to the home’s resale value. Remodeling the home’s bathroom and kitchen countertops will always result in a positive return on investment (ROI).
The ROI of a project represents the percentage of the money spent on the remodel that would be instantly recouped upon sale of the home. The ROI of a project can only be capitalized upon through the sale of the home. If there are no plans to sell the property, ROI’s can get much more complicated.
Home equity tax benefits
Tax credits for home equity loans are typically no issue to actualize. The interest a person pays on their home equity loan is almost always returned on the homeowner’s federal tax refund the next year. Tax-deductible interest is the best case scenario when investing in a home remodel, and a home equity loan qualifies.
As opposed to other financing options
A home equity loan is not the best option for everyone. For example, a person cannot take out an equity loan if their home has not yet accrued any equity. Personal loans are always an option, but they typically do not come along with the best interest rates.
Another option would be to take a cash-out refinance on the home. This option will refinance the homeowner’s mortgage for more than the home is worth. Sometimes the interest rate on a cash-out refinance is a bit lower, so it could be a beneficial option for funding a remodel.