If you have a substantial equity position in your home, and you’ve paid down your mortgage over a 10 to 15-year period of time and you have quite a bit of equity, it’s not a bad idea to draw on some of that equity to utilize it to fix up your home. Keeping your home up to snuff, as well as keeping it up with the times, can be not only a good idea but also a very important investment.
Somebody who has a 3% mortgage and has almost paid off the house can sure as heck invest in a home equity loan or line of credit. This is particularly true if that owner may be getting the property ready to sell at some point.
However, it’s best to be careful when you borrow money against your home. First of all, home equity lenders don’t generally like to go above 80% of the home’s value. That includes the existing mortgage plus the new home equity line of credit. There’s a little bit of a limitation there, which is a positive because it also limits any damage that can happen if you had to sell your house right away.
Once you take out a home equity loan, now you have much less equity in it because you’re utilizing it to improve the home. So, you need to use that money wisely to increase the value of your property.
When improvements are made the increase in value depends on what was done to the property. If you’re doing landscaping or you replace your driveway that’s not going to improve the value much.
Updating kitchens and baths are what makes a difference. Adding square footage also increases value. Those are the areas that will get you a bigger bang for your buck quicker.
If I redo my bathrooms, I’m expecting right off the bat that I will be getting half of that back in the increased price of the house. If I own a house that’s worth $100,000 and I put $50,000 into a bathroom I would expect that the house is now worth $125,000.
That’s a gutting and complete fix of a bathroom, which will probably be around $50,000 for a significant improvement. That’s how crazy the cost of some of these renovations are. When you speak with a trusted loan professional at a patrolman credit union or another trustworthy financial institution, they will provide you with that type of insight when you inquire about a home equity loan.
A significant number of minor improvements can add up to a significant increase in value, although probably not as much as a kitchen or bath. So, let’s say you’re taking that same $50,000 on a home equity line of credit. Instead of spending 50k on a bathroom, you spend 25k for a complete landscape improvement – front yard, cobblestone, sprinkler system, all the goodies. You get the outside of your house looking really good. I don’t think that $50,000 is going to show up the same way in increased value, but where that will help is in the curb appeal when you sell your house.
That is very important but that improved curb appeal isn’t going to be the same dollar for dollar trade-off on what you’ve invested. It is possible but not likely. This is especially true if the bathroom desperately needed to be redone but you chose to redo the landscaping instead.
You need to be prudent when you spend your money from a home equity loan in order to get the biggest bang for your buck. The rule of thumb is, again, improved kitchens and baths and additions to the house where square footage is added.
If you’re adding another room to the house your comparable sales are now going to be based on homes that are bigger than the former size of your house. Keep in mind that finished basements, while desirable, generally cannot be added to the square footage of a property.
However, if you add a second story to your home now the comps that you’re looking at won’t be single-family ranch homes. You’re going to compare your property to other two-story homes. That, of course, is going to immediately increase the value of your house.
If the improvement is cosmetic, it’s not going to be nearly as much of a bang for your buck. Every market has its own suckers. When I say suckers I mean customers that believe exactly what a realtor tells them. “Oh, I just did a comparative market analysis on your house and, man, you can get top dollar on your house.” You think to yourself as a professional at Police Mortgage, “OK, somebody pumped that into somebody’s head.”
Some owners think that just because they did some cosmetic stuff to the house, which may make it look nicer, that they have increased the value of the home significantly. They fail to remember the fact that the house is still small. It doesn’t have two full bedrooms. It doesn’t have a contemporary kitchen. There’s no garbage disposal. Things like that add to the base layer of what is thought of as a nice house by most buyers.
When clients come to me and relay that their realtors told them their homes are worth “X” the first thing I’m going to do is pull out the comps. I want to see what other homes have sold for in the area. Show me the prices of the homes and show me how they compare to the home my client wants to sell.
So, when you’re looking at a home equity loan to invest back into your home think kitchens, bathrooms, and adding square footage. That may very well be a wise way to use equity and increase the value of your home through renovations and upgrades.
Police Mortgage specializes in conventional mortgages, purchase money transactions, FHA loans, and VA loans. Led by founder and CEO John Aretos, Police Mortgage is known and respected for providing clients with exceptional service, customized terms, quick and easy closings, and low money down options. To learn more about Police Mortgage, call 312-499-8878.
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