Real estate investors make a lot of noise about how rental properties are excellent at hedging inflation and appreciating value. Although, the often untold part of the equation is that you must maintain said value by keeping the house and performing occasional upgrades. If you’re looking to sell your property soon or in the distant future, having a modern home with the right improvements will undoubtedly give you an edge.
However, did you know you don’t have to take out a loan to finance your next remodeling project? Instead, you can tap into your home’s value to borrow money for a renovation. This guide is perfect for you if you’re debating the pros and cons of using home equity to remodel your home.
How to Use Home Equity for Remodeling
- Find a Reliable Lender
The first step to using home equity is finding a reliable lender. Some experts refer to this method of financing as a second mortgage, so you might consult your original lender to find out if they’re willing to help again. Still, shopping for better rates or more favorable terms would be wise.
- Evaluate Your Credit Score
Like traditional loans, your credit score can affect your eligibility for a home equity loan. Thus, it would be best to evaluate your credit report and ensure it’s in good shape. If you’re planning months, you can boost your score by paying your outstanding bills on time. You can also get pre-approval to up your chances.
- Fill an Application
When you’ve found a reliable lender, the next thing to do is fill out an application. Beware of fine print with ludicrous additional costs and terms. These often hidden details can run up the cost of your renovation. Discuss any home improvement plans with an expert property manager to ensure ROI is maximized and the terms benefit you.
Pros and Cons of Using Equity for Remodeling
- Tax Deduction
Homeowners are entitled to several tax deductions to help them cut costs and save money. Fortunately, interest paid on a home equity loan qualifies for tax exemption by the IRS. Considering you can also remove factors like wages and travel expenses, these deductions could make your renovation project cheaper than you initially budgeted.
- Low-Interest Rates
Another significant benefit of tapping into your home’s equity is that you enjoy some of the lowest interest rates. For example, the funds you would require for a remodeling project are typically under short-term loans, which are more expensive. However, home equity loans use a fixed rate, which means you can budget your monthly payments appropriately with no hidden charges.
As we highlighted in the introduction upgrading your property gives you a better edge in the market. Minor cosmetic changes with a high ROI could allow you to tack on thousands of dollars to your asking price. Even if you don’t plan on selling your property, improved homes are more attractive to tenants, and many would be willing to pay more for a newly refurbished apartment. Either way, you look at it, the value of your home and the balance in your wallet increases.
- Upfront Money
If you’re looking for a lump sum of cash quickly, a home equity loan is undoubtedly the route. Borrowers can count on receiving the total amount they want at once and can then focus on paying back over time. In addition, since the interest rates are also fixed, the value of the money you borrowed depreciates over time, saving you more cash in the long run if you pay up on time.
- Property As Collateral
One of the most significant downsides to using a home equity loan is that it is essentially the same as using your home as collateral. Although the risk is significantly lower than other loans, there’s the chance that a series of unfortunate events could mean losing your investment. Such an outcome would render all your renovations worthless and could create a hole in your portfolio. If the risk of using your property as collateral is too significant for you, you can look into an FHA mortgage for homes in dire need of repairs. Again, asking what is 203k loan is an excellent place to start.
- Additional Costs
Although you can depend on home equity loans having low-interest rates, you also have to pay up certain additional costs. Typical fees you might have to pay include an appraisal fee for a home inspection, document preparation fees, and closing costs. Some lenders even charge an early payoff fee if you plan to end the loan before the scheduled term to avoid paying excessive interest.
Although home equity loans are a great way to finance your next remodeling project, it’s not the best solution for everyone. Suppose you’re looking for fixed low rates with a decent ROI and tax deduction. On the other hand, home equity loans don’t have a reputation for causing undue financial stress and could deliver the kitchen remodels you’ve been dying to get. Either way, you’re better off doing more research, searching for a reliable lender, and boosting your credit score if you want to go ahead.