You could be eligible for some incredible home equity benefits as a homeowner if you’ve paid off a sizable portion of your mortgage. The smart idea of using home equity for remodeling projects is something most homeowners appreciate but do not know how to achieve.
You can improve your home to meet your desired state without blowing your retirement savings or taking a high-interest loan of any sort. If your home is currently worth more than you owe on the mortgage, you can get a home equity loan to fund some remodeling projects.
This article discusses the different ways you can use your home equity for remodeling projects. But before that, let’s find out what home equity is all about and why you need it for your remodeling projects.
What is Home Equity?
Home equity is a homeowner’s financial interest in their home. That is the difference between the house’s value and the amount owed on the mortgage.
For example, if a homeowner’s home is worth $400,000, but they still owe $150,000 on their mortgage, their home equity is $400,000 minus $150,000, which is $250,000
Home equity is a great asset in the hands of a homeowner. It can be used to make profitable investments like remodeling projects, consolidating debt, and paying for college.
The value of home equity can increase in two ways: through a substantial mortgage payment and through an increase in a home’s market value. Your home’s market value increases with the increase in the value of the real estate market in your area and when you make improvements to it.
Can You Use Home Equity for Remodeling Projects?
You can use your home equity for anything you want, but using it for remodeling projects in your home is a smart decision. Every renovation or improvement in your home results in an increase in its value, which means an increase in your home equity.
It is like taking a low-interest loan to invest in a guaranteed high-interest investment. It comes back to you in a more substantial form.
However, not every remodeling project results in a substantial increase in a home’s value. That’s why it’s necessary that you use your home equity for the right projects.
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Ways to Use Home Equity for Remodeling Projects
Using your home equity for these remodeling projects will yield significant benefits to you.
1. Bathroom Renovation
Remodeling your bathroom is a profitable way to use your home equity loans. According to the Remodeling 2022 Cost vs. Value Report, midrange bathroom remodeling has an average cost of $27,164 and produces a 58.9% return on investment (ROI).
A midrange bathroom remodel involves changing the tile floors, replacing the chrome fixtures, overhauling the solid surface vanity counter, etc. Since these things cost an average of $27,164, it’d be difficult to fund the remodeling from any other source but home equity.
2. Roof Replacement
If your roof is old or leaking in some parts, it’s time to replace it, and doing so with home equity is a good investment decision. This is because roof remodeling ranks as one of the best home improvement projects one can undertake. However, it is quite expensive to achieve with personal or credit card funds. An asphalt shingle roof costs an average of $31,535 to be replaced, while a metal roof costs $51,436.
Though asphalt shingles have a shorter lifespan than metal roofs, they produce more ROI (59.6%) than metal (54.8%). In both cases, however, you can see that it’s worth it to channel your home equity toward a roof replacement.
3. Kitchen Remodeling
Kitchen remodeling is a big undertaking in home improvements, one you can’t take on with your personal money or credit card funds. A minor kitchen remodeling project costs $28,279, while a major one costs $80,809 (for midrange) and $158,015 (upscale).
While it is great to use your home equity for kitchen remodeling, looking at the ROIs will help you make a better decision on the kind of kitchen remodeling to do. A minor kitchen remodeling project yields a 71.2% ROI, while the midrange major and upscale major return 56.1% and 52.5%, respectively.
4. Exterior Improvements
Another fantastic way to put your home equity to use is to enhance the appearance of your home’s exterior and the neighborhood. This involves getting a new front door, landscaping your home, repainting the building, changing the roof, putting up a fence, etc. It generally refers to revamping your home’s exterior to give it better curb appeal.
Exterior improvements can give anywhere from 70–90% ROI, making it one of the best remodeling projects you can undertake with your home equity.
5. Garage Door Replacement
Replacing your garage door is one of the cheapest remodeling projects you can do with your home equity. Yet, with a cost recouping rate of 93.3%, it yields the highest return.
You can also add it as part of your exterior improvement projects, with other projects like deck replacement, exterior lighting, fiber cement siding, etc.
Alternatives to Home Equity for Remodeling Projects
Even if you don’t have enough home equity, you can also carry out remodeling projects on your home to increase its market value. Here are alternative income sources for your home improvements:
1. Personal Loans
Though they’re not the best sources for remodeling projects, home equity can be useful when you have no other means to carry out minor home improvements. They come with high interest rates, a low loan amount, and short repayment periods, making them costly sources for home improvement projects.
They are, however, unsecured loans, meaning you won’t lose your home if you default on your payments.
2. Cash
If you have any cash saved up, it can be useful for your home improvement plans. It’s even better because you wouldn’t risk rising interest rates or losing your home or other properties in the event of a loan default.
3. Credit Cards
Credit cards are also nice alternatives to home equity for remodeling projects, especially the introductory 0% APR cards. You can qualify for the 0% APR cards by maintaining a good credit score.
Since you won’t be paying interest, using these cards to fund your remodeling projects is even preferable to using home equity. However, you must make sure that you repay the loans before the credit cards’ promotional period expires.
4. Retirement Savings
If you can, avoid using your retirement savings for remodeling projects. But when you have old and leaky roofs and low home equity value, it might be your only source of funds. Therefore, make sure you’ve tried all other options before using your retirement funds for home improvement projects.
How to Access Your Home Equity
There are three main ways you can access your home equity: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.
1. Home Equity Loan
A home equity loan is exactly what it sounds like: a loan secured by the equity in your home. That’s why it’s also known as a “second mortgage,” as it is secured by your home.
2. HELOC
A home equity line of credit (HELOC), unlike a home equity loan, offers you a revolving line of credit. This makes it possible for you to pay back only the funds you used, not the full loan amount. However, a HELOC has variable interest rates and other disadvantages you might want to look at.
3. Cash-out Refinance
A cash-out refinance is another way you can access your home equity. This system provides you with a lump sum of money while replacing your existing mortgage. That means, instead of making two monthly loan payments, you’d only have one to make.
Advantages of Using Home Equity for Remodeling Projects
These are the advantages of using your home equity for remodeling projects:
- You increase the value of your home with funds accessed from your home’s existing value
- The interests paid on home equity loans are tax-deductible
- Home equity loans come with very low-interest rates when compared to unsecured loans
Disadvantages of Using Home Equity for Remodeling Projects
These are the disadvantages of using home equity for remodeling projects:
- You risk losing your home should you default on home equity loan repayments.
- If you’re using a HELOC, chances are high you’d pay more than you should pay due to rising interest rates
- A fall in the value of your home could lead to a foreclosure action from your bank
Ways to Use Your Home Equity for Remodeling Projects – A Conclusion
When you receive your home equity, you might be tempted to use it for things other than the intended purpose. While you’re the one in control of your home equity, you should be sure to use it on relevant things that would yield the needed ROI.
Hopefully, having outlined the different ways you can use your home equity for profitable remodeling projects, you can make the most of the funds and reap better returns.
