4 Questions to answer before using equity to fund home improvements

By: Kristi Hart

April 25th, 2019

Being a homeowner comes with a constant need for repairs and maintenance on your home and sometimes funding these repairs can leave you looking for another way to pay for them. I see offers all the time using creative financing to use the value of your home to pay for a new pool or new kitchen, but is it really a good idea? Using the equity in your home to fund home improvements is generally a great idea as long as you keep these 4 things in mind:

1. What will your return on investment (ROI) be of your home improvements? Improvements to kitchens and bathrooms realize the highest return with most returning 70% of cost to the homes resale value. That beautiful outdoor space or pool area, while being a great addition for you, may only return 30 – 50% of the actual cost, so keep that in mind.

2. Will the improvements cause the home to be “over” improved for the age/style of home or neighborhood? Being the highest-priced, most-improved property in the neighborhood doesn’t always work to your advantage when you attempt to sell. Potential buyers may think your home is “over-priced” for the area, not see the value of the improvements or feel your taste doesn’t fit the home’s style.

3. What are the terms of the financing you are obtaining? Financing is available through many sources at varying rates, fees and terms. Is this a revolving line of credit with a variable rate or a fixed rate/term loan? Is this an interest only payment? Many revolving types of financing offer a variable rate usually tied to the Prime Rate, but the minimum payment only requires the interest be paid each month thus never reducing the principal balance that you borrowed. These rates can typically be a bit lower at the beginning, but can adjust upward as changes in the market occur. Make sure you know the maximum annual adjustment and maximum rate that can be charged. These plans usually have a pre-set revolving limit that you can continue to borrow as needed. This is great if planning multiple projects where you want to borrow funds as you go. Just don’t make the mistake of using the credit line as a sort of “reserve” cash account for normal daily expenses. A fixed rate loan is one that you agree to borrow a set amount based on a specified term and rate. This option is a great choice if you aren’t planning to need to advance additional funds beyond the current project. It also gives you the peace of mind to know that your payment or interest rate won’t vary and the loan will be repaid in a specific number of months.

4. What are the fees associated with obtaining the financing? Paying a small origination fee or appraisal costs to determine equity in your home is common. In most cases these should total not more than $500 - $600. Sometimes a special lower interest rate isn’t the best deal if accompanied with high closing costs or origination fees.

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