If you have a mortgage in your home, you’ve probably built equity. Equity is the amount of mortgage you’ve already paid off. Home equity can be a great funding solution if you want to renovate or remodel your older property but haven’t saved enough cash.
However, before tapping into your home equity for remodeling or a home improvement project, it’s a good idea to understand the best way to use this financing option and the pros and cons.
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Best Ways You Can Use Your Home Equity for Renovation
Many homeowners use their home’s equity for various reasons. So whether you want to remodel your kitchen, bathroom, or patio, here are the best ways to use your home equity for your next renovation project.
Value-added Home Renovations
One of the obvious reasons homeowners do renovation or remodeling projects is to add value to their homes. Not all renovation projects, though, add to a home’s value. Some major renovation projects, such as adding a second story, extra rooms, and building a patio/deck, are known to increase a property’s value.
Capital improvements are permanent home renovations or additions that increase the property’s value, extend the property’s life, or change its use. Examples of capital improvements include installing kitchen cabinets, a water heater, and building a deck. Your home’s equity can help you make capital improvements on your property.
Another great way to tap into your home equity is doing energy-efficient upgrades. This can include installing energy-efficient lighting, hot water heater, appliances, programmable thermostats, and even adding insulation. Not only do energy-saving improvements lower energy bills and improve comfort, but they also increase a home’s value.
Renovations for Medical Needs
Home renovations for medical needs, such as expanding the doorways, installing railings, and support bars, lowering kitchen cabinets, and other qualifying home modifications, are fully deductible. However, some medical renovations, such as installing an elevator so that a disabled person doesn’t have to use the stairs, can increase the value of your home. Since medical renovations are expensive, using your home equity to finance such undertakings makes sense.
Other Tax-deductible Home Improvements
Home improvements are generally not tax deductible for personal residences. However, you may qualify for a tax credit if you install energy-efficient equipment, such as solar panels and geothermal heat pumps, or upgrade to energy-saving windows. In addition, medical renovations are also tax deductible.
Other home renovation projects that may qualify for the tax credit include home office improvements, capital improvements, and repairs for federally-approved disasters.
What are the Benefits of Using Home Equity to Renovate?
Using your home equity to renovate your property has several advantages, including:
Because home equity loans are secured by the property you borrow against, they tend to have interest rates that are lower than unsecured loans like personal loans and credit cards. In addition, a home equity loan has a fixed interest rate, meaning you’ll make fixed monthly installments over the life of the loan.
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Return on Your Investment
Tapping into the equity in your home to get the funds you need for your home renovation project is a great way to get your return on your investment. Whether you’re renovating your basement, attic, or garage door, most home improvement projects increase a home’s value. However, it’s important to note that ROI is only realized when you sell your home.
Avail of Tax Deductions
Another potential benefit of using your home equity for renovation is the tax write-off. The interest paid on home equity loans and home equity lines of credit (HELOC) may be tax deductible up to a certain amount if you use the funds to substantially improve the home that secures the loan.
What About the Drawbacks of Using Home Equity to Renovate?
While using home equity to renovate comes with benefits, going this route has drawbacks, too.
Your Home May be Used as Collateral
One of the major disadvantages of taking out a home equity loan is that you risk losing your home if your financial situation changes down the road. If you fall behind on your monthly payments or, in the worst-case scenario, default, your house may face foreclosure.
Therefore, before taking the plunge by signing a home equity loan agreement, it’s wise to evaluate your current and future financial situation. This includes your current debt level, employment situation, and other factors that may affect your ability to make on-time loan payments.
Possibility of Loan Recall by the Bank/Lender
A home’s value changes with the market. During a market downturn, for example, it can cause the value of your home to fall below the amount you still owe. If this happens, the bank or your lender may recall the loan and force you to pay off the remaining loan balance immediately. Failure to do so could lead to foreclosure.
With that in mind, it’s always a good idea to never borrow more than what you need for your home renovations to avoid a loan recall. Plus, ensure that the renovation you plan to do is going to boost the value of your home.
It Might be More Than What You Need
Lenders typically have minimum borrowing requirements for home equity loans, meaning you may have to borrow more than what you need, especially if your renovation project is minor. However, using your home equity to renovate your property might make sense if you plan to do major renovations, such as room addition or building a second story.
If you have smaller projects like refreshing your rooms with new paint, giving your kitchen cabinets a new look, or installing new lighting fixtures, it may not be a good move to take out a loan with huge minimum borrowing requirements. Instead, consider alternatives like personal loans, cash-out refinance, or credit cards for such projects that will save you money.
There are Additional Costs
In most cases, using home equity to secure a loan for home renovation projects comes with extra costs. Since a home equity loan is considered a second mortgage, you’ll need to pay closing costs ranging from 3% to 6% of the total renovation project and other fees. This includes appraisal fees, origination fees, credit report fees, and other additional costs. Therefore, it’s crucial to take into account such costs when deciding if using home equity to renovate is the right choice for you.
Tap Into Your Home Equity to Renovate Your Home
Are you ready to tap into the equity in your home to finance your renovation projects? If so, you can trade your home’s equity for cash through Unison without accumulating debt. Unison can help you unlock up to 17.5% of the equity you’ve built in your home without having to pay interest or make monthly payments. At the end of the agreement–in 30 years, when you sell the home or when the last homeowner passes away–you will repay the initial amount and a percentage of your home’s change in value.
Visit the Unison website to see how much equity you can unlock by answering a few simple questions.