How Does Home Equity Contribute to Home Improvement?

Many homeowners envision creating the perfect home by taking advantage of the latest designs and technologies at their disposal. However, trying to find the funds to finance their dreams may prove to be a challenge.

One way to enjoy a quick influx of cash is via home equity. You can use the money to renovate your home, which will increase the real estate value of your home.

You can also use the money to make repairs so that you can fully enjoy your home. Here, our focus will be on how home equity can contribute to home improvement.

What is Home Equity?

Home equity is defined as the current value of your property minus the amount that you still owe on your home. If the number is positive, then it means that you have some equity. The higher the number, the more equity you have.

You can quickly build home equity by increasing your monthly mortgage payments. Making home improvements, such as renovations and upgrades, can also help you build home equity faster.

Reducing your loan term may also help. For example, you can cut your time in half. By refinancing your, say, 30-year mortgage into a 15-year mortgage, you will be able to build home equity twice as fast.

Gifts from loved ones, an inheritance, tax returns, and work bonuses can all be used to pay down your mortgage to build more equity on your home.

How Do You Calculate Home Equity?

First, you need to determine the current market value of your home. You then need to subtract your mortgage balance from the amount. If the amount is a negative figure, you have not built any home equity for the time being.

As for types of home equity loans, you can opt for a fixed-rate home equity loan. Your lender will provide you with a lump-sum amount. You can use the money to renovate your home if you wish. The money will need to be repaid over a set amount of time with a fixed interest rate.

A home equity line of credit (HELOC) serves as a form of revolving debt. In other words, as the loan balance is paid down, you will be able to borrow it again. However, you can only borrow money during the draw period.

One key difference between a HELOC and a fixed-rate home equity loan is that the interest rate is variable with a HELOC. As market rates fluctuate, the interest rate will also change over the duration of the loan.

A cash-out refinance can allow you to refinance your current mortgage for more than the amount that you currently owe. You can then take the difference in cash and use it to repair your home.

For example, imagine that your home is valued at $400,000 and that you still owe $200,000. Let us also imagine that you need to make $40,000 worth of repairs on your home.

With a cash-out refinance, you can opt to refinance with a $240,000 mortgage, allowing you to take the $40,000 cash difference to repair your home.

Conventional mortgages are known as first mortgages. You can think of home equity loans as second mortgages. In either case, the property in question will be used as a form of collateral. Your current financial status will also determine the interest rate.

Both first and second mortgages will also include a similar set of fees as well. Also, in the case of a cash-out refinance, you are getting a new first mortgage instead of a second mortgage.

Benefits of Using Home Equity for Renovations

You can easily make home renovations by taking advantage of your home equity. Many people are unaware that they can make use of their home equity to improve their homes.

Also, when you invest your home equity towards home improvements, you can take advantage of low interest rates. The loan limits also tend to be high, especially if you are in good financial standing.

Furthermore, the interest you pay may be tax-deductible, which is another benefit of using home equity to renovate your home.

You can also opt to repay the amount owed over a prolonged period. You do not need to feel pressured to pay back the amount quickly. Speak to your provider to negotiate mutually beneficial terms.

As can be seen, home equity is a good choice if you want to renovate your home.

Taking the First (or Second) Step

Using the equity that you have built over the years on your home can be used to renovate your home. Interest rates tend to be low, and repayment terms tend to be generous as well.

You can use the money to increase the value of your home, and the interest that you pay may also be tax-deductible.

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Christophe Rude

Christophe Rude

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