How to borrow like a boss for home improvements
For as long as there have been homeowners, there have been home improvement projects. It could be a kitchen renovation. Or adding on that deck to the back of the house... Or maybe turning the basement into an official-size laser tag arena. For the kids, of course. (Hey, we’re not judging).
Whatever we’re looking to do, there are some crucial home improvement questions we need to answer before we start picking out paint samples or taking a sledgehammer to that wall.
Will this help increase the price I can get for my house if I sell in the future?
Before we do anything else, we must answer this one. We should carefully consider whether the improvements we’re planning will increase the market value of the home. Some improvements can add a lot of value — even more than the amount spent in some cases. Others, not so much. Beyond the monetary considerations, home projects can range from “necessary” to “extreme” and everything in between. Making sure improvements are appropriate for the type of home and neighborhood is also important. Bottom line, the best improvements increase both the value and our use and enjoyment of the home.
Do I have equity in my home?
Equity is the current value of our home minus what we still owe on our mortgage. That value builds over time as we pay on our mortgage (and home prices stay steady or go up). If we have enough equity, we may be able to use it to pay for the improvements we want to do. (More on this later)
Do I have good credit?
Our credit history will play a big part in our ability to qualify for a loan, and maybe even help us get better terms on a renovation loan.
(P.S. - If you’re looking to up your credit score, check out our quick guide for making that happen.)
What kind of loan is right for me?
This is the big question, right? The good news is that we have plenty options for paying for these home improvement projects. Let’s take a look:
Home Equity Line of Credit
- The basics – This loan allows us to use the equity we’ve built up in our home to make improvements. Better yet, we can borrow funds as we go and pay interest only on the loan amount we’ve used. In most cases, these loans may let us borrow up to 90% of the value of our home.
- Example – Our house is worth $190,000 and we currently owe $155,000. Let’s say we’re able to borrow a maximum of 90% of the home’s value. In this case, our home equity credit line could be up to $16,000 for improvements. Here’s how the math works. Our home is worth $190,000 x 90% = $171,000 minus the $155,000 we still owe = $16,000!
- The basics – Once again, we’re tapping into the equity we’ve built up in our home to pay for home improvements. But instead of ending up with two loans (our existing mortgage plus a new credit line), we’re totally refinancing our current mortgage at a higher amount to cover what we owe now and give us the money to make our improvements. In some cases, a cash-out refinance may also help us improve our interest rate. The amount we can typically borrow on these loans is generally around 80%.
- Example – Let’s say our house is worth $180,000 and we still owe $120,000 on the mortgage. We could do a cash-out refinance and have $24,000 for home improvements. Here is how the math works on this one. Our home is worth $180,000 x 80% (the percentage we can borrow) = $144,000. That $144,000 is $24,000 more than the $120,000 we owe. Which means we now have $24,000 to use for those improvements.
Unsecured Home Improvement Loan
- The basics - This one is a bit different - it’s not connected to the value we’ve built up in our home. It’s a personal loan from the bank to us that’s not secured by a mortgage on our home. Usually, the interest rate is a little higher and we can’t borrow quite as much. Talk to us to see how this type of loan might fit your home improvement needs.
If you have a question, don’t hesitate to drop us a line, give us a call, or just stop in to talk. We have the know-how when it comes to financing that home improvement project. Also, check out our ebook for more great tips and information on how you can borrow like a boss.