Buying or Building a Home
6 minute read time
Home renovations can be motivated by several factors, including enhanced comfortability, better use of space and a higher home value. If you’re planning a home improvement project, your home equity may be used as a tool to help you achieve your goal. Consider the key benefits and distinctions of home equity loans, home equity lines of credit, renovation loans, cash out refinancing, and personal loans.
Low home inventory and the competitive housing market have prompted some homeowners to stay put and get creative with the spaces they already own. With home values still appreciating, homeowners may consider investing in home remodeling projects as an alternative to buying a new home.
Beyond the typical motivations for home improvement projects, like comfortability and the opportunity to increase a home’s value, many homeowners are evaluating their current living spaces to align with their lifestyle and goals. For example, with the onset of the recent pandemic, homeowners were forced to take an honest look at their homes and assess if the living space met their current needs.
Whether you’re looking to adapt to your evolving lifestyle or simply improve your home’s style or livability, now might be the right time to invest in your current home. If you’ve been dreaming of a home remodeling project, here are a few benefits and various options based on your unique situation and goals.
Your home is likely your most valuable asset. In addition to making your home more comfortable during this unique season, improving your home can be a wise long-term investment. By making strategic improvements to your home, you can invest in your ability to retain and grow the value of your home if you plan to sell in the future.
Tapping into your home’s equity can be an effective way to fund home improvement projects. Once you understand your project goals, it’s important to discuss with your advisor to determine which option is right for you.
A home equity loan is secured against the equity in your home. Paid out in a lump sum, a borrower repays the loan through a fixed monthly payment at a fixed interest rate.
Consider a home equity loan if you need a large sum of money upfront to pay for a home improvement project. This can be a suitable option if you have a specific project with an estimated cost in mind. You may choose to use a home equity loan for a large project like a kitchen renovation or a significant addition to your home.
Due to the current rate environment, home equity loans may be an attractive option. Fixed payments offer predictability, enabling borrowers to keep financial goals on track with easy monthly budgeting. Home equity loans also allow homeowners to rebuild the equity in their home as they make loans payments. Additionally, there may be tax benefits for some borrowers, depending on the type of improvement that is made.
A HELOC is also secured by the equity in your home. Similar to a credit card, it allows you to borrow from a line of credit – just as much as you need, when you need it. The interest rate is variable, meaning interest can fluctuate from month to month, and is charged only on what you borrow.
Consider a HELOC if you are planning a project that will span a significant amount of time, and you are unsure of exactly how much money you’ll need for the project. A HELOC may make sense for smaller-scale projects over a long period. Whether working on a DIY project or with a contractor, HELOCS offer flexibility to draw money when you need it. Keep in mind that a HELOC offers less predictability for monthly budgeting due to variable interest rates.
Like home equity loans, you can replenish your available line of credit and the equity in your home as you pay down the balance. During the draw period, a borrower is required to only pay back interest, initially resulting in lower monthly payments.
A renovation loan factors the future value of the home into the loan amount. It may be appropriate for large remodeling projects, like a bathroom remodel or transforming a home into an open concept living space.
You must work with a contractor on the project to qualify for this type of financing. Additionally, the project must add value in excess of the cost of improvements. A renovation loan is often used by borrowers who purchase a “fixer upper” and intend to renovate.
A renovation loan enables you to borrow based on the projected value of the home updates. As with home equity loans and HELOCs, you have the opportunity to build more equity in your home.
Using the equity you’ve built in your home, cash-out refinancing replaces your current mortgage with a single loan for all of your borrowing needs. It is essentially a loan that is higher than the current amount you owe on your mortgage, with the difference being paid out to you in cash.
In order to qualify for a cash-out refinance, you must have a certain percentage of equity in your home. Cash-out refinancing will result in a new monthly payment and interest rate.
Due to the current rate environment, cash-out refinances may offer a lower interest rate than your first mortgage if you originally financed your home at a higher interest rate. As with the options above, cash-out refinancing can be a tool to build even more equity in your home.
There are two main types of personal loans – secured and unsecured. A secured loan enables you to use collateral besides your home to finance, such as a car, boat or an RV. An unsecured personal loan is not secured by any item of value, such as a credit card or student loan.
Borrowers may choose a personal loan for short-term, smaller financing needs. Keep in mind that personal loans generally have higher interest rates than home equity financing options.
If you are interested in improving the value of your home, but don’t yet have a substantial amount of home equity, a personal loan can be a great alternative. It may also be helpful for someone who is looking to pay off debt sooner rather than later, as it will likely have a quicker payback period.
Advisors at Johnson Financial Group are here to help. We understand that everyone’s situation and needs are unique. A conversation with your advisor is critical to understanding your options. Contact an advisor today.
Loans are subject to credit and property approval, bank underwriting guidelines, and may not be available in all states. Other loan programs and pricing may be available. Certain conditions, terms, and restrictions may apply based on the loan program selected. The term of the loan may vary based upon program chosen. Property insurance is required; if the collateral is determined to be in an area having special flood hazards, flood insurance will be required.