Suppose you’ve been pining to redo your bathroom and make it into a sanctuary, complete with a soaking tub, seamless glass doors and dual shower heads, skylights, heated marble floors, dual vanities and extra storage space. Most home improvement experts agree that a typical bathroom remodel will yield about an 83% return on investment in the short term but the enjoyment and tranquility it provides may outweigh the cost of the home improvement.
If you’ve been in your home for a long period of time and have built up equity over the years, a home equity loan or line of credit may be the best way to go to make upgrades to enhance the resale value or simply to enhance your comfort in the home. Unlike other methods of obtaining funds for home improvement, a home equity loan or line of credit is generally tax deductible up to $100,000 as long as the funds are used to improve the home. However, if the combined amount of your first mortgage and the home equity loan (second mortgage) is greater than the current value of your home, the deduction may be limited.
When considering whether to take out a home equity line of credit for home improvements, it is important to understand that an equity loan may provide a tax benefit, yet it may not be worth the risk of losing your home should you default on the loan since a home equity loan is secured by your home.
On the other hand, if you’re planning to stay in your home for a longer period of time, a home equity loan (HEL) can be a great way to enhance the aesthetics, comfort, entertainment and long term value of your residence. Don’t expect to fully recover the amount of the remodeling investment right away. On average, you can expect to recoup between 80% and 90% of your home improvement expenses, within the first few years. Longer term, an appealing remodel can even make you money should you decide to sell.
A home equity loan can make your dream of putting in a swimming pool or adding a game room become reality but enhancements like these might not yield the return on investment you anticipated. On the other hand, renovating a kitchen, adding a deck or installing hardwood floors may pay off in the long run. Before you apply for a home equity home improvement loan, do your homework to learn how the home improvements will affect your home’s appraised value, be familiar with comparable home amenities and decide how long you are willing to stay in your home to recoup your investment.