Whether you want to remodel your entire home or just upgrade the kitchen, funding your project is a key step in the process. Using your home’s equity may be the best way for you to do it.
Banks typically lend up to 90 percent of the equity value you’ve built in your home. So, for example, if you have $150,000 in home equity, you may be able to borrow up to $135,000, using your home as collateral.
Work with your bank to determine how much of your home equity you can tap into because lender amounts, rates and terms will vary. Whatever amount you borrow, you can use the loan to fund your projects: roof upgrade, new patio deck, interior renovations, etc. Whenever you take out a loan, it is smart to be clear on stipulations in the agreement about how you can use the funds.
Each method has advantages and disadvantages. You should determine what option best fits your situation.
Also known as a second mortgage, these loans allow you to borrow a set amount of money for your project. You will be given a fixed interest rate and be expected to make monthly payments commencing immediately upon taking out the loan.
A HELOC allows you access to a line of credit. You can use as much of the money available, whenever and however you choose over a fixed period, often 10 years.
Repayment is based on the terms of your HELOC but is much more flexible than a home equity loan. While you need to make only minimum monthly payments, the final amount that you borrow will have to be repaid at the end of the agreement. These loans are offered with a range of variable interest rates.
Getting funding through a home refinance involves updating your current home mortgage, adjusting the interest rates or terms of the loan and taking out cash at the same time. You’ll be reducing the equity you have in your home. Home refinancing can reduce your monthly mortgage payment if you extend the term of your repayment schedule.
When contemplating your financing options, review first how much is available for you to borrow. And then think about how much you can actually afford. Remember that loan originations involve fees and costs, so factor those into your calculation. And consider the long-term effect of having (likely) higher monthly financial obligations. Are you comfortable with this?
If, after serious consideration, you’re still ready — and your project will be well within this budget — it might be time to talk to a lender about how to use your home equity.
Learn more about home equity options.