Using Home Equity to Finance Home Improvements
If you are thinking that your home could use some tender loving care by updating or renovating your living space, consider utilizing your home equity. Many homeowners use their home equity to increase the value of their property with home improvements. Adding a pool to the backyard, renovating the kitchen or bathrooms, updating the flooring, or refreshing the curb appeal are all great ways to add value to your home.
What is Home Equity?
Equity is the difference between the total value of your home and the amount owed on the mortgage. Essentially, your home equity is the percentage of the real property value you hold.
Three ways you can earn equity:
The portion of your mortgage payment that is paid toward the principal balance is earned equity. As you continue to pay back your mortgage loan over time, you earn more equity in your home.
The housing market also helps you build equity over time. Competition for housing and appreciation over time can both cause home values to rise. The value of your investment is increased and as a result, you earn equity.
Increasing the value of your property through home improvements is sometimes called “sweat equity.” Equity is earned by raising the market value of the home by increasing its marketability to potential home buyers.
Taking a look at your Home Equity
Not everyone is financially ready to access their home equity. Both time and changes in the market can impact the amount of equity you have in your home. In order to take equity out of your home as cash in the state of Texas, you must have more than 20% of your home’s value as equity. Which means that you cannot owe more than 80% of the value of the home on your mortgage to qualify for a home equity or cash out refinance.
If you have been paying your mortgage for a number of years or recent market conditions have increased the value of your home, you may be able to access that equity through a cash-out refinance. The fair market value of your home would be determined by a professional appraisal, during the loan application process. The appraisal report will value your home based on the size and condition of your home, as well as recent sales of comparable home in the market.
We wrote more about home appraisals in our article, “Why do I need an Appraisal?”
Put Your Equity to Work with Home Improvements
As a home owner, it is important to keep your home in good working condition. You are both protecting your investment and potentially increasing the resale value of your home by making updates and repairs. Using your home’s equity and reinvesting it in your home is a financial choice that many homeowners make.
With a well planned home renovation, you could potentially increase the value of your home by more than the amount it costs to make the home improvements.
Learn more about building a financial plan as a homeowner in our article, “3 Smart Money Moves for Homeowners.”
Getting a Home Equity or Cash Out Refinance
Whether you call this type of mortgage refinance a home equity or cash-out loan, the results are the same. A refinance loan that allows you to take equity out of your home as cash is a good way to finance home improvements for many people.
Mortgage loans usually have lower interest rates than other types of financing options. Other ways to finance your home improvement goals like credit cards, store credit, and personal loans all typically come with higher interest rates than a home equity loan would.
Speak to one of our licensed mortgage consultants about your potential to get a home equity refinance, and get a custom quote on the rate and terms.
We are here to be the mortgage experts on your team. Reach out to us with your questions about getting a cash-out refinance. We would be happy to show your potential mortgage options and help you reach your home improvement goal.