At its core, the concept behind home equity is a simple one. It’s a term that describes the market value of your “unencumbered interest” in your home – meaning, the difference between the fair market or “appraised” value and the outstanding balance of any and all loans that you may still owe. If your home was worth $200,000 and you still owed $100,000, for example, the equity on your home would be $100,000.
What a lot of people don’t realize (especially first-time homeowners) is that it’s definitely possible to remodel your home to help it look and feel precisely how you want it and improve the amount of equity you have at the exact same time. There are three responsible, budget-conscious techniques in particular that you’re going to want to know more about.
A Home Equity Loan is exactly what it sounds like – a loan that you’re taking out against the equity in your home. To continue with the above example, it would be possible to borrow against the $100,000 equity in your home for nearly any purpose you’d like. However, there are a few reasons why it’s a good idea to do so specifically with renovations or other improvements in mind.
If you borrow against your home equity to make improvements that improve your home’s value, you’re thus creating more equity – and improving your return on investment exponentially. If you make these types of home improvements, continue to pay your mortgage on time and the value of your home goes up, you’ve created a tremendous amount of equity in a short amount of time.
Just understand that if the value of your home goes down, the amount of equity you have will decrease with it. Therefore, if you’re going to explore this opportunity to fund your next remodeling project, make sure you are focusing on the projects that will help build your equity the most.
A Home Equity Line of Credit, on the other hand, isn’t a standard term loan. Much like a credit card, it offers a line of credit or set amount of money that you can “withdraw from” as necessary. Payments aren’t going to be due unless there is an outstanding balance – meaning that if you never actually withdraw any money, you won’t have to make any payments.
Home Equity Lines of Credit are typically for projects or expenses that are paid for little by little over long periods of time versus having a specific loan amount to pay back over a set number of months. If you were undergoing a massive renovation project like installing an all-new kitchen and have only one charge, you’d probably want a larger (and more immediate) cash injection of a Home Equity Loan. If you are making smaller modifications over a longer period of time without one set total cost, a Home Equity Line of Credit would more likely be more appropriate. Also, if you have other outstanding expenses besides a renovation such as a wedding, college costs, medical bills, or an emergency repair, a Home Equity Line of Credit can provide funding for that as well.
Finally, it’s critically important for you to understand that not all renovations will improve your home’s value. A pool may be something you’ve always wanted, for example – but that might not be true of a buyer when the time comes to sell. Pools are expensive and require a lot of upkeep, meaning that they could actually hurt your home’s value, not help it as you thought.
Generally speaking, improvements that will increase your home’s value include finishing your basement, creating a home office, updating your kitchen or bathrooms, and anything related to landscaping and/or curb appeal. Provided that you focus on these areas with your Home Equity Loan or HELOC, you’ll find that the effort is worth it by way of your ultimate return on investment.
Ultimately, the most important thing to remember is that home equity is something that should always be considered – but especially when it comes time to remodel your property. The best ways to use home equity are always the ones focused on the bigger picture. It’s less about short-term gains and more about the types of long-term benefits that you can unlock for yourself by properly tapping into your home’s equity. When you are ready to apply for your HELOC or apply for your home equity loan, feel confident that your research has helped you find the perfect solution for your needs.