Home Improvement (Image Source: sraroofs.com)
Home Improvement Projects such as a Kitchen and Bathroom remodels add significant value to your home if they are done properly. In fact, remodeling your kitchen and Master Bath will increase the sale price of your house by 10-30% according to National Association of Realtors research. Now that we know these Home Improvement Projects will increase your home value, let’s explore how you will be funding them.
1) Home Equity Line of Credit (HELOC): HELOCs is a line of credit that you can establish with your bank where they will issue you a checkbook for your Home Improvement Projects. The maximum amount of the HELOC is determined by your credit score, home value and your debt-to-income ratio. The advantage of using a HELOC vs a Home Equity loan is that you are only paying interest on the amount you borrow for your projects. So, HELOCs are ideal for quick flip projects where you are not going to hold on to the property for a long period of time to be subject to the interest on the full amount borrowed.
2) Cash: If you do not have to borrow money and use your own funds for your Home Improvement project, so much the better. However, it would be a smart move to do a cash-on-cash return analysis to explore the alternatives for you cash investments. Perhaps if you were making 20% return in a Start-Up, then it might be wiser not to use your own cash and borrow money for Home Improvement Projects.
3) Home Equity Loan: The equity you have in your Los Gatos home can be utilized to fund the Home Improvement projects. Equity is determined by the difference between your home’s current value vs the amount of existing loans attached to it. For example, if your home is valued at $500,000 but you only owe $300,000 to the bank, then you have $200,000 of home equity available. However, no bank will loan you this $200,000 since the resulting situation would be that you have a 100% loan on your house with no equity. The amount of Home Equity loan would be restricted by the ratio of total loans to your home’s value (LTV). Most banks will loan up to 80% of LTV. In the example above with the existing LTV is at 60%. So, there is room for banks tt add a 2nd loan on top of the existing 300,000 loan. The home owners in this example should be able to borrow an additional $100,000 for Home Improvement Projects. Lending Tree is one site where you can search for best home equity rates and compare the programs to choose the one that best fits your needs. Most major banks offer interest rates as low as 2.78% on Home Improvement Loans for an owner occupied Home.
4) Credit Cards: Last option to explore to fund your Los Gatos Home Improvement Projects should be your credit cards. Keep a close eye on your borrowing however, since if you exceed 30% of your credit limit, your credit score will be impacted negatively. The other challenge with using credit cards to fund your Home Improvement projects is that you will be charged much higher interest rate compared to HELCO or Home Equity loans. After all credit card debt is un-secured and much risky for lenders. Since the lenders are taking a much higher risk, the interest rates of your credit card borrowing will be much higher.
Regardless of your source of funding, Home Improvements projects offer you the best way to increase your home value, specially if you do some of the work yourself.
Contact Us if you need help funding your Home Improvement Projects.
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