A lot of us have been spending more time at home than we’re used to, which means it’s harder to escape those little home-improvement projects we’ve been putting off. If you’ve got a “honey-do” list almost long enough to use as wallpaper for your bathroom, you’re not alone.
Sure, you might have more time to think about these projects, but how are you supposed to find the money?
There are a couple of good options: a Home Equity loan, and a Home Equity Line of Credit (HELOC).
What can you do with home equity loans and HELOCs?
What’s fun about these loans is that they can be used for a lot of different things. While it’s true that a majority of people use a Home Equity loan or HELOC for a home improvement project like remodeling a kitchen or a bathroom, there’s no real limits on how they can be used. Here are some ideas to spark your creativity:
- Build a backyard space to enjoy outside- It’s winter right now, but good weather isn’t so far away. Besides, wouldn’t you rather have a great outdoor space ahead of time? Don’t spend all summer building that new deck or patio, spend it enjoying the fruits of your labor!
- Update where you spend your time inside - If you can’t go out, you’re going to have to stay in. Alleviate that boredom by giving yourself something worth staying in for. This could be a new entertainment center, a man-cave (or woman-cave!), a games room, or just a living room where your family actually wants to live.
- Destroy your home’s pain points - You know that thing about your home that bothers you every time you notice it? Get rid of it! Maybe you need to replace a sink, rewire some switches, or knock out a wall. It doesn’t matter what it is, there’s no reason you have to live with it anymore. Home improvements don’t have to be huge, groundbreaking projects. They can be simpler quality-of-life improvements, too. But if you want to finally reconfigure that kitchen to make it easier to move around while you cook, well, you can do that too.
Finally, here’s a little secret: Your Home Equity loan or HELOC doesn’t actually have to be for your home! There are no Home Equity police coming around to make sure you spend the money just on home renovations. Some people use these loans for other big expenses, like medical bills or education.
There are, however, some cases where using a Home Equity loan is not the smartest financial decision. Starting your own business with a Home Equity loan, for example, is a risky move. Remember, your Home Equity loan or HELOC uses your house as collateral, so don’t put yourself at risk of losing your home, if your business doesn’t take off.
What’s the difference between a Home Equity Loan and a HELOC?
You’ve probably heard these terms before, but you may not have stopped to think about them until you decide to get one. Home Equity loans and HELOCs both use the equity in your home – the difference between your home’s value and your mortgage’s balance – as collateral. This means you get pretty competitive loan rates, certainly better than trying to pay for everything with your credit card.
A Home Equity loan is essentially a second mortgage on your house. You get the full amount of your loan at the beginning, and the repayment period starts.
A Home Equity Line of Credit (HELOC) is a bit different. The “line of credit” part of HELOC is the key: Like a credit card, you draw on your line of credit when you need it. Most lines of credit come with a checkbook or a debit card to give you access to your needed funds. With a HELOC, there’s a draw period and a repayment period. During the draw period, which at AgFed is 180 months, you can withdraw funds up to your line of credit. Once your HELOC enters the repayment period, the amount you’ve withdrawn becomes the balance you owe, with interest.
Not sure which would be better for you? Contact us to speak with a loan officer.
What is equity and how do you build it?
Your home’s equity is the difference between the amount you could sell your home, and how much you owe on your mortgage.
This example might be too simple, but it should help you get the idea: Take the total value of your home, let’s say $250k, and subtract your current mortgage balance (ex. $150k). The $100k that’s left is the equity in your home!
The first way to build home equity is, of course, to make a large down-payment. If you look at the home equity example above, you can see how a big down-payment helps you build equity quicker. Unfortunately, if you’re already making payments on your mortgage, this news might come a bit late. But it’s worth keeping in mind if you buy a house in the future. Fortunately, this isn’t the only way to build equity.
Another simple way to build equity is to pay more on your mortgage each month. While you’re paying both principal and interest with every payment, a larger portion of your payment goes towards the interest in the beginning. If you can make extra payments toward the principal every month, you’ll pay off your mortgage faster and build equity faster, too. There are a few ways to do this, including switching to biweekly payments, upping your monthly payments, and even using the occasional “extra” money like tax refunds to get ahead.
You can also refinance your mortgage to a shorter term, which might lower your interest rate and should pay off your loan faster. A shorter mortgage term does mean higher payments, however. Another option is to simply wait for your property value to rise, but you don’t have much control over this. Still, it’s good to check your home’s value when you’re trying to figure out your equity.
Maybe the best news for home improvement geeks is that increasing your property value also builds equity! A good home-improvement project may mean your house is worth more than was before. You should keep in mind, however, that you probably won’t recoup the entire cost of your project. Remodeling Magazine’s 2020 report shows the average home improvement project only gives you a 64% return on your investment, so be sure to choose those projects wisely.