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Using Home Equity for Remodels

by Matt Myers

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You have already paid all of this money in principle, and it stands to reason that you should leverage that in whatever way you can. There are two basic ways to get the most of your home equity when you are considering a remodeling project. The two smartest and most common methods of financing a home remodeling project are using your Home Equity Line of Credit (HELOC) and/or a Home Equity Loan. These two methods are often difficult to distinguish, but this article can shed a little light on which is which, while getting you on your way to a fantastic home remodel.

HELOC
So how does it work? A Home Equity Line of Credit is exactly like a credit card that you set up with your lender. You have a credit limit that is proportional to the amount of equity you have in your home. Once you have your HELOC account set up, simply advance yourself funds by writing a check. You will pay interest only on the amount you borrow, just like with a credit card. You can use your home equity line whenever you need just like the plastic you have now.

Home Equity Loans
Home Equity Loans are yet another way to finance larger projects from the equity you have in your home. These are often called second mortgages (as are HELOCs), and you are allowed to borrow a certain amount no larger than the current equity you have in your home, either from principle payments or property value increases. These are standard loans with fixed rates, and they usually have to be paid back in 15 years or less. With these loans, you borrow a specific amount and have a set monthly payment.

Advantages to Financing Home Remodeling Projects with Home Equity
The average cost of a complete kitchen remodel in the United States in 2004 was $30,000. This is a big enough number that most homeowners need some type of financing, if only partially, to help cover the cost. While both Home Equity Lines of Credit and Home Equity Loans are good candidates for any remodeling project, depending on the project, one might be better than the other.

Kitchen & Bathroom Remodels
These are the two most popular home remodels. They add value to a house, and in many cases have a massive return on their investment. The problem is that estimates from contractors are exactly that, and nearly every project ends up costing a different amount—whether higher or lower—than was originally planned. You will change your mind about 100 times on which materials you want to use, the contractor will run into unforeseen problems, the market price of your materials will fluctuate, among many other things that will swing the price.

The great thing about HELOC is that it is a credit card and you are only paying interest on what you borrow. Let's say you have a $25,000 line of credit that you have earmarked for a kitchen remodel. Your contractor bids your remodel at $15,000. Now you have $10,000 in wiggle room in case you decide on cherry cabinets rather than pine, or stainless steel appliances rather than keeping your old ones. If you decide to hold back a little for the time being, you don't have all this borrowed money lying around.

In the cases of bigger remodels that have several components, HELOC might be the way to go because it allows you the freedom to get a little more money or use a little less. Granted, your interest rate will not be locked in, but this is the rub with HELOC.

Swimming Pools & New Windows
Because of the nature of swimming pool additions and replacing your windows new, the pricing is fairly static. There might be a little flux, but typically these types of remodels don't bounce too much in price. As a result, a home equity loan might be the best route. You take out exactly what you need, and pay for the project in full from the loan check. Sometimes using a home equity loan for remodels that have variant pricing can leave a homeowner without enough money to pay for the project, or they are left holding too much cash because they over-budgeted. Try as we might, most of us aren't strong enough to give that money back as we should.

Dollars & Sense
There are dozens of home remodeling projects that are expensive enough as to need financing: home additions, cabinets, flooring, siding, windows, a new roof, just to name a few. These are just two very smart ways to finance your home remodeling projects. If you have a rich aunt, win the lottery, or discover sunken treasure off the coast of the Bahamas on vacation and want to use that money for your kitchen remodel, that is fine, too. But for most of us, the financing options listed above are the best ways to go.

Matt Myers is a freelance writer for the home maintenance and remodeling industry. Formerly a contractor specializing in deck building and casework, Matt has written over 500 articles for both homeowners and contractors.