If homeowners were given an unlimited expense account to remodel their home, very few would turn it down to stick with their house exactly how it is right now. There are almost always repairs and upgrades to be made, not to mention adding new design styles to modernize the home or improve functionality so it supports the current flow of the family.
It’s not about what you can afford; it’s about what makes sense in your home. Budgets are important—making one, and sticking to it. Using home equity is an option where the house pays for its own improvements.
Reputable companies will usually provide an initial consultation for free. This will save you money upfront and also help define project expectations from the get-go, which also saves you money in the long run. Learn more in our blog “With Home Reno Options, Choose the One Right for You.”
If you decide you definitely want to renovate, and you’re wondering where to find some extra funds, maybe tapping into your home equity is the right financing model for you. Read on to learn more.
What Is Home Equity?
Home equity is a good thing! It’s the amount of your home that you actually own—not the part that the bank owns. In other words, equity is the difference between what your home is worth and what you still owe your lender.
As you make payments on your mortgage, you reduce the “principal,” or the balance of the original loan (not including interest), and you build equity.
For example, let’s say you buy a home worth $100,000 with a 20% down payment of $20,000. In this case, you would already have $20,000 of equity in your home the moment you close. With every mortgage payment you make, the balance of your loan decreases, and your home equity increases.
Once you have enough equity built up, you can access it by taking out a home equity loan or a home equity line of credit (HELOC).
What is the difference between a home equity loan and home equity line of credit?
A home equity loan is like a traditional mortgage. You borrow a specific amount as a one-time cash payout, and then you make regular payments during a fixed time period.
The good news with a home equity loan is that you borrow against the portion of your home that you own outright at a fixed interest rate and often at a lower rate than other options. The downside is that you need to have a certain amount of equity built up in your home in order to qualify, and your home is at risk of foreclosure if you default on payments.
It’s helpful to think of a home equity loan more like a second mortgage; whereas, a HELOC is more like a credit card.
A home equity line of credit provides ongoing access to your equity funds rather than a one-time lump sum. Bank of America explains it this way: “Unlike a conventional loan a HELOC is a revolving line of credit, allowing you to borrow more than once. In that way, it’s like a credit card, except with a HELOC, your home is used as collateral.”
Learn more differences between using your home equity as a loan or line of credit, so you can choose what’s best for you.
How to Access Home Equity
To learn more about home equity, including how to access it, you should speak to a trusted financial advisor. You can also learn more from Bankrate, where you can watch an informative video tutorial and explore current rates from multiple lenders.
To obtain accurate facts, figures, and advice about your particular mortgage and financial situation, you can contact the bank who holds your mortgage, or stop by the local branch where you do your banking.
Can I pull equity out of my house without refinancing?
Whether you choose a home equity loan or a home equity line of credit, you can access your home’s equity while avoiding refinancing. This applies to investment properties too.
How much of my home equity can I borrow?
A home equity loan generally allows you to borrow around 80% to 85% of your home’s value, minus what you owe on your mortgage. Some lenders allow you to borrow significantly more—even as much as 100% in some instances. But be careful borrowing such a high percentage of your equity; remember that your home is being held as collateral.
The amount isn’t much different with a HELOC. According to Rocket Mortgage, “Borrowers can usually get up to 85% of their home’s equity. However, from that amount comes your current outstanding mortgage balance. Between all loans, you can have 85% of your home’s value outstanding at once.”
Can I get a loan from a different bank, or do I have to go with the company who holds my current mortgage?
You can contact any bank, credit union or mortgage broker you’re interested in (look for the ones with the lowest interest rates and best terms). For home equity loans, you are not bound to your current lender or mortgage servicer.
A Local Kitchen Remodel Company You Can Trust
The truth of the matter is—if you love your home and don’t want to leave it, remodeling the house is probably a good way to go. And if you’ve lived in your home long enough for it to warrant upgrades, you might have built up enough equity to make financing the remodel a piece of cake. For icing on top, the money you’re using to remodel your home is a reinvestment back into the value of your home, which ultimately becomes its own kind of equity.
If you want to remodel but decide not to use your home equity, there are other financing options available, including Straight Line’s in-house line of credit through Synchrony.
You’ll know whether your financing is approved in as little as 30 seconds after you submit our online form. This means you’ll have a great idea of how to set your budget before your free consultation or visit to our showroom.
With us, you can finance your home remodel with as little as 0% interest for 18 months. Our rates are comparable to home equity loans and lines of credit. The approval process is fast, safe, and private. Click to learn more.
With interest rates as high as they are right now, remodeling your home is likely the more sensible option than trying to sell and buy a new one.