How Do Home Equity Loans Work for a Remodel?

Transition of Beautiful New Home Kitchen From Framing To Completion.

Homeowners naturally are interested in taking care of and improving the value of their properties. One great way to enhance one’s home is to take out home equity loans. Home equity loans can be used to finance remodel projects. As time goes on, homeowners with mortgages build up their equity. This equity can be used as a sort of bank.

Lenders are willing to provide loans using home equity as collateral. If you are a homeowner, you probably have equity in your home that qualifies you for a loan. Put some research into a home equity line of credit. You might be surprised at how much you’re qualified to borrow.

It’s not easy to fund a home remodel project yourself. You might not want to spend your savings on the project. However, home remodels are important for maintaining and improving home value. The more effort you put into your home, the more you get out of it. You should explore the possibilities of using home equity loans for a remodel. This will help you determine if a home remodel can improve your financial situation.

How to Use a Home Equity Loan For a Remodel

To get a start, first, you need to understand the process. There are numerous steps you need to go through. Planning is essential. A home remodel project is a big investment. The more thoroughly you plan, the more successful the project will be.

There are a few keys steps to the process. Obviously, the main step is to apply and be approved. However, there are additional steps that some homeowners don’t execute thoroughly enough. The following are three key steps when it comes to home equity loans for remodel projects.

First, Let’s See What Home Equity Loans are?

Home equity loans are a type of secured loan. They are secured by the homeowner’s property. As with any other type of loan, it’s necessary to apply and be approved. Some lenders will be interested in what type of home improvement project the homeowner is undertaking. The home is the collateral on the loan. Therefore, keeping the home in good condition and improving the home’s value is important to the lender. However, generally, the lender will just be interested in the homeowner’s equity.

Home equity loans work like other loans. The prospective borrower applies. If approved, the lender sends the funds to the borrower’s account. Then, the borrower can get started funding his or her home remodel project. Usually, the borrower needs to start making payments on the loan immediately.

Planning Your Remodel

With any home remodel project, there are numerous options to choose from. What home remodel are you interest in? Do you want to remodel your kitchen? Your bathroom? Do you want to focus on your home’s exterior? Are you more interested in making your home more comfortable for yourself and your household? Or are you more interested in increasing your home’s resale value?

Before you get the start, you need to think about all these options. Be as specific as possible. Not only should you know what remodel work you’re interested in, but you should also work out the details. Determine what contractor you’re going to work with exactly. Also, get an estimate on the expenses.

Shopping for Loans

You need to shop around for loans. Various loans that are available to you will be more or less appropriate for your needs. Obviously, the priority is to find the best interest rate. You need to also find a loan with an affordable monthly payment.

Many lenders will allow you to calculate a loan estimate on their website or when you visit in person. Using this loan estimate, you can compare offers from different lenders before applying. Remember that you don’t want a lot of inquiries on your credit history. You, therefore, need to evaluate home equity loan lenders before committing to applying.

We bring you some mortgage loan options to look into. Enter the necessary information and you may get a suggestion you like:


Setting a Budget

Don’t get carried away with your home remodel project.
You don’t want to spend any more on your project than the amount your project increases home value by. You also don’t want to pay more per month on home equity loans than you can afford.
Careful financial planning is essential. Take the time to crunch the numbers. Another loan is going to increase your monthly expenses. It’s essential to be aware of this and to plan for it.
Your home remodel plan should explain your goals. However, it should entail spending limits. Setting a budget is an essential step. Don’t overlook this step or the expenses of your remodel could quickly get out of control.

Minimizing the Costs of Your Remodel

No matter what expenses you have, it is very important to know how to save money on car repair or house improvement. Your budget will be grateful to you.

You can and should minimize the costs of your remodel during the planning stages. Any type of home remodel is not going to be cheap. As an example, the average kitchen remodel costs $23,166. This is a significant chunk of change. However, you can bring remodel costs down significantly through research and resourcefulness. Low-cost alternatives are available for those who put the effort into finding them. Once you know what you want to achieve in your remodel, put time into minimizing costs. This will maximize the ROI of your remodel project.

Remodel Expenses

As part of minimizing remodel expenses, you need to make a list of what all those remodel expenses are. Brainstorm and figure out every expense of your remodel project. It’s easy to overlook significant expenses if you don’t take the time to make a list. When it comes to evaluating remodel expenses, the organization is key.

Don’t try to do it all in your head. Take the time and make the effort to actually write things down. You’re probably going to overlook some expenses at first. When you make a list, you can come back to your list later and add expenses you initially forgot.

Home remodels cost by room

Materials

One of the biggest expenses will be your material costs. The materials you need depend on your remodel project. If you’re remodeling your kitchen, your remodel costs could include flooring materials like tile or countertop materials like granite.

Minimizing material costs takes effort and resourcefulness. Ideally, you should work with a contractor who will give you options with sourcing materials. Your contractor should be flexible about where materials are coming from. You can conduct your own research on material suppliers in your area. Look for discount material suppliers rather than going straight to big-name suppliers that are likely to charge more.

Labor

Labor is going to be your next big expense. As with materials, you can bring down labor costs as well through effort and resourcefulness. You can bring down labor costs by being flexible. Have your remodel work carried out during the off-season for most contractors to bring down expenses? Work with the schedule of your contractor. Consider carrying out DIY work on any remodeling tasks you can handle yourself.

Another thing you can do to bring down labor costs is answering promptly to communication from your contractor. As work progresses, your contractor may have questions for you. If your responses come late, it could slow down the progress of the project. Be in constant communication and check up on work progress regularly to minimize labor costs.

Refinancing With a Home Equity Loan

If you’re interested in home equity loans, you might want to do more than just cover remodel expenses. You might want to refinance a mortgage entirely. Your home equity gives you more financial leverage. This means you can get better terms on your mortgage with equity. You should at least consider the possibility of a home equity loan refinance.

The right home equity loan can do more than just pay for a remodel. It can pay off your mortgage loan and lower your interest rates. You should definitely research the possibility of reducing your interest costs through the right home equity loans.

Advantages

The biggest advantage of refinancing with home equity is reducing interest costs. However, this is not the only advantage. The other two big advantages to consider are financing remodels and reducing monthly payments.

The right remodel can drastically increase your property’s value. This could mean big earnings for you when you eventually sell your property. Also, home equity refinance could be the perfect solution for you if you’re struggling to keep up with mortgage payments.

Procedures

The procedure for a home equity refinance loan requires careful planning and calculations on your part. The savings comparing your existing mortgage to your refinance should be large enough to justify the change.

You’ll apply for the home equity loan. You’ll provide details on your income, identity, and current equity. Then, you can evaluate. The lender will provide you with an offer if approved.

If you decide to accept an offer, you’ll pay off your existing mortgage. It’s important to determine if you can pay off your mortgage without any fees. Some mortgages and loans entail early repayment fees, so this is something you should look into.

Outcome

The ideal outcome of a home equity refinance is lower interest costs. However, an even better scenario is having additional funds left over for a remodel. Finding the best solution for you is all about effort. You need to see what you’re eligible for according to your income, credit history, and equity. Then, you need to act accordingly.

Qualifications for a Home Equity Loan

If you’re a homeowner interested in remodeling, you need to know the requirements for approval for home equity loans. As with most other loan types, home equity loans require a credit inquiry. Your chances of approval are better if you have a strong credit history.

Credit is not the only consideration that’s taken into account. Your income level will also be looked at. The lender will want to evaluate your income. If you’re not making adequate income, you may fall behind on repayment.

Credit and income are considered with qualifications for a home equity loan. However, the most important consideration is the home equity itself. As a general rule, you’ll need to have at least 15 percent equity in your property to be approved.

Leveraging Your Equity

Homeowners need to understand the value of home equity. Home equity is an asset that homeowners should capitalize on. Home equity allows homeowners to borrow at better rates and to be more loan worthy.

In order to fully leverage equity, it’s important to keep up with mortgage payments. Home equity loan providers will probably look at your payment history on your mortgage loan. If your payment history has been flawed, it might be harder to get approved.

The more you’ve paid off on your mortgage loan, the better able you’ll be to leverage equity.

Different Types of Home Equity Loans

Doing your research is important before taking out a home equity loan. There are numerous types of home equity loans to familiarize yourself with. You need to analyze the particular financial situation you’re in. This analysis helps you find the right home equity loan type.

Every home equity loan focuses on the principle of using equity as collateral. However, this can be done in numerous ways. Three main types of home equity loans to understand are:

  • cash-out loans
  • refinance loans
  • lines of credit

You need to understand the details of these loan types.

Cash-out Loans

A cash-out loan is a great option because it provides you with cash on your equity. You can use this cash for whatever you want. Cash-out refinances can often provide you with low-interest rates. You won’t be able to get cash for the full value of your home equity. However, you could get a cash loan value of up to 80 percent of your equity. Even if you don’t have much equity in your home yet, this still might be enough to finance a big home remodel project.

Refinance Loans

A refinance loan might typically be a little more extensive and involved than a mere cash-out loan. A refinance loan typically completely pays off a mortgage. With your existing equity in your property, you may qualify for a better interest rate than when you bought your home. You might even be able to refinance and have money left over for a remodel.

Refinance loans are also called a rate and terms loans. Refinancing with your home equity updates your interest rate. It could also make your mortgage more affordable. You can adjust your monthly payment when you refinance while leveraging your increased equity.

Lines of Credit

You could apply for a line of credit to fund a remodel project. In fact, you might even qualify for a line of credit up to the full value of your home equity. A line of credit home equity loans could provide you with maximum funds for remodeling. However, you won’t have to use all these funds at once. Lines of credit are like credit cards. You have the credit available if you want to spend it. However, you don’t have to. A line of credit home equity loan could be a convenient way to make funds available during home remodels. This way, you have funds available if the project costs more than expected.

In Conclusion

Whatever decision you make should focus on optimizing your financial situation. Realize that home equity loans are great resources. Use this resource effectively for big earnings and big savings. Don’t overlook the resources that your home equity makes available to you.

Now that you understand how home equity loan financing for remodels works, it’s time to start. It’s time to start taking advantage of your house equity. Unfortunately, a lot of homeowners aren’t fully aware of home equity value. Every payment you make toward your mortgage improves your net worth. You need to be aware of this to maximize your financial potentials.

There are potential remodel improvements for just about any property. Engaging in a home remodeling project can not only be good for your finances but also enjoyable. Many homeowners get a lot of satisfaction out of taking care of their homes. Put some thought into the best remodel projects for your property.

Finding home equity loans is not generally complex. Lenders are typically eager to work with homeowners. Because they have the home equity as collateral, they’re generally eager to provide the loan. Therefore, you shouldn’t have any problem with approval. As long as you’ve paid a good chunk of your home value, you should have adequate equity. Start today to make serious improvements to your home’s resale value!

Home Equity Loans When It’s Time to Leverage Your Asset

Surprise bills can come up at any time forcing you to need money fast. Before you turn to family and friends, look at your homeownership. You may have a  huge savings account you did not even realize you have in your home. It is called your home equity and it can help you to leverage your asset.

If you own your home, even if you have not yet paid off the mortgage completely, you can leverage the equity in your home. Their home is typically the most valuable asset of most Americans. As you pay off your residential mortgage, you build equity. Equity refers to the amount of the paid off value of the home mortgage. If you have a mortgage of $400,000 and have paid off $200,000 of your mortgage, you have earned 50 percent of the home’s equity. At 2018’s end, US homeowners had amassed $5.9 trillion in equity. You can leverage your asset to get your loan.

Your Guide to Understanding the Mortgage Process

Leverage Your Asset: Home Equity Loans in General

You might wonder how that equity helps you. You can use your equity to refinance your home or borrow against it for a cash-out loan or establish a line of credit. Each of those three options works in a different way.

  • Refinance: also called a rate and terms loan, this option lets you obtain an updated interest rate and loan terms based on the amount you have left to pay off on your original mortgage
  • Cash-out: another type of refinancing loan, this lets you use up to 80 percent of your equity to access cash from the home’s value
  • Line of Credit: establishes an account equal to your equity or a portion of it that you can draw money from as needed to pay for any item you need

Warning: The Lender Will Need to Foreclose on Your Home if You Do Not Pay Your Mortgage Back

That may sound like an odd warning since you would not have equity in the first place if you had not been paying off your mortgage, but many people take out a home equity loan because of a major need. It is typically a large, costly need, such as medical bills for a major emergency. It can often complicate the repayment process since by accessing the equity, you erode it. In other words, you owe that money all over again. You give up the money you already paid into the home.

Most financial lenders force you to leave about 20 percent of your equity in the home. If you take out a Veteran’s Administration loan though, you can access 100 percent of your equity. That puts you back to the first day you bought your house though. You would need to pay the whole home off again. That is a major caveat to accessing the equity. It puts you back at square one.

Qualifying to Leverage Your Asset

Qualifying to use your home’s equity comes down to more than whether you have built equity in it. You must meet multiple criteria:

  • a minimum of 15 percent equity of the fair market value of your home, also referred to as a loan-to-value ratio
  • a FICO credit score of at least 620
  • a history of paying off debt
  • a documented repayment capability
  • a debt-to-income ratio of less than 50 percent

Home Equity Options

Of the three home equity options, you must choose the one that works best for you. This depends on your specific situation. First and foremost, the reason for the loan determines which home equity option to use. Other factors that influence what is available to you including your credit history, income and your home’s value.

Leverage Your Asset: Home Equity and Paying Down Debt

You can use home equity loans to obtain money to consolidate debts and quickly pay off credit cards, student loans, or auto loans. The house provides the collateral for a cash-out refinancing loan, making it easier to obtain a lower interest rate. If you need to pay off a bunch of debts, a cash-out refinance mortgage makes the best choice.

Why?

A credit card might have a high-interest rate, perhaps an APR as high as 25 percent. If you have even one card with that APR, you pay your principal debt and a quarter of it back. Obtaining a cash-out loan lets you pay off the card and pay only a few percent interests on the loan. You typically spread the payments out longer since most mortgages range from 15 to 30 years, but you make quick progress paying down your debt. The trick is to not use the credit card again once it gets paid off. Once you pay the cards off, you obtain a zero-interest or low-interest credit card for use. This lets you avoid the previous problem. You then close down the higher interest cards.

Think Twice Before Everything

Here’s the thing and I know that I am repeating myself, but I cannot stress it enough — you have to know that you can easily pay back the new mortgage. If you miss payments, you lose your home. Period. The bank will foreclose.

This may seem simple at first, but realize that you probably started out with a 40-year mortgage. You already paid into it for 10 to 15 years to build the equity you have. Now, you are erasing that equity and spending it to pay for something. Since you are taking out a new mortgage, you will get new terms. You probably will not get another 40-year term. You will have fewer years to pay it off. So, let’s assume you get 30 years to pay it off and you used 80 percent of your available equity. That means you will have higher mortgage payments than you did initially. You owe more with less time to pay for it. You could end up still paying off your mortgage in retirement.

Also, you are spending a ton of money on a single expense. If that expense pays you back, that helps. If it does not, you are losing money and you need to re-pay the mortgage. So, if you know that you can easily re-pay it, go ahead and take out the line of credit or the loan. If not, try for a different loan type.

Leverage Your Asset: Home Equity and Renovations or Major Purchases

Perhaps you need to renovate your home or want to remodel it. This can cost thousands of dollars and you will need to pay the contractor all at once. They may flow the funds through and pay the sub-contractors they use or you may have to pay the subcontractors directly, too. You will need to purchase materials for them to use.

Also, you might need to purchase a new vehicle, or have an existing vehicle modified with a lift or something else. You may need to purchase an SUV or RV for work purposes.

These large expenses that may require multiple expenditures benefit from a home equity line of credit. This revolving credit line lets you withdraw from it when needed without a new application and works better than a reverse mortgage.

Leverage Your Asset: Home Equity and New Mortgage Terms

You can also refinance your residential mortgage simply to take advantage of lower interest rates and better terms. This way you can save money in the long-term. You may end up with smaller monthly payments and a lengthy-term to repay it.

For this refinancing to work to your advantage, you need to have a superb credit score to leverage your asset. That lets you qualify for the lowest interest rates and the best terms possible. The higher your credit score, the better.

Borrowing Limits

The borrowing limits are there to protect you. While a VA loan will allow you to tap 100 percent of your available equity, it is not a good idea. Your equity stems from the part of your home you already paid off. The less equity you use, the less you have to re-pay in addition to the money you already owe. This means you should use as little equity as possible.

Important Factors Regarding Home Loans

No matter what kind of loan you decide to take out, there are risks. You will also have upfront expenses.

Any type of loan application creates a hard inquiry on your credit report. That creates a temporary reduction in your credit score. It typically only ranges 5 to 10 points, but it still happens.

You will need to pay for a home appraisal, also you pay new title fees and one-quarter of the annual property taxes. These expenses you can roll these expenses into the loan. You will also get a refund on your existing home insurance and an escrow account. There is a delay though.

“We don’t want people to be extended outside their means. If they are rolling revolving debt into a 30-year fixed, yes the monthly payment goes down, but you are stretching it out over time.” – JPMorgan Chase & Co. executive director and senior lending manager Fady Semaan told Forbes

Loan Shopping Made Easier

The modern way to find a loan is to start at Loanry. The site functions as a loan mall. Just like you shop for blue jeans at a shopping mall, you can shop for a loan online. At Loanry, you can fill out and submit a form that creates a soft hit on your credit and lets you know about loans for which you might qualify. You can reduce your research by using it. All you need to do is enter your information below, and wait for potential offers within the next few minutes. Start here:

Once you have a list of potential lenders, you need to meet with each. Ask them to explain the available loan plans to you. Ask the loan officer questions to clarify the loan terms and conditions. Make sure you fully understand the following:

  • the monthly payment amount
  • the interest rate
  • the APR points
  • the finance charges
  • the application, appraisal, broker, document preparation, funding, loan processing and origination/underwriting fees

Getting Ready to Apply for a Loan

You might feel ready to jump in and apply for a loan after speaking with the loan officers. Do not apply yet. You should know some things before taking out a home equity loans that loan officers may not tell you.

First, check your credit score. You requesting your own score does not affect your score. It does not create a hard inquiry. You will not lose credit score points for checking it yourself. So, make sure your credit is application ready. You can do this for free using the US government website.

What Your Credit Score Includes

You might think three digits cannot say much about you, but to a financial lending institution or creditor, it tells a long story. It goes back at least seven years. Credit score is important for this type of mortgage, same as it is important for FHA loans.

Credit score ranging

Ranging from 300 to 900, it tells the loan officers if you pay on time, if you have a lot of credit cards, if you take out too much credit and if you max out your cards – in three digits. Few people actually have a 300. That would mean you never paid anything you had taken out and you really overextended yourself. A 900 tells the bank you are a credit god or goddess. You make a lot of money, you always pay on time or early, you barely use the credit you do have and you manage your money really well.

Most people have about a 550 to a 640. That means the average person is late sometimes, pays on time mostly, uses about half of their available credit. That means there are some people who cannot get a loan, some people who easily get a loan at a great rate and the majority of people who can get a loan, but have to pay a higher interest rate to mitigate the risk of them paying late or not at all. Your credit score encompasses the following:

  • your bill-paying history
  • how many accounts you have and the type
  • your late payments
  • any collection actions
  • your outstanding debt
  • how long you’ve had your accounts

An algorithm determines your score based on that information. Your score gets compared with the credit performance of other individuals with similar profiles. That probably sounds unfair. You get judged by the other people who the algorithm says you share the same traits, but the system works pretty well. If you recently landed a job that pays you far more than when you established your credit, it shows when you pay back your loan even more quickly.

Boost your credit score

You can boost your score pretty quickly by paying everything on time for six months. This will bump you up by about 20 points.

You should also check for mistakes in your credit report. If you find incorrect information, you will need to file a dispute with the credit bureau from which the report came. This is because each creditor reports to a different bureau or bureaus. Some report to all three, some only to one. You need to check your report on all three because you do not know which credit bureau the bank will use. If incorrect information shows up on all three, then you need to dispute it on all three. Do not apply for a loan until the dispute is taken care of on all three bureaus, if it appeared on all three.

Lender Negotiations

After you have met initially with each potential lender, rather than pick one, negotiate with many. Make them compete for your business by letting them know that you are shopping around for the best deal possible. Negotiate the fees, points and interest rate on each. Tell them what the other lenders offered and asked them to beat it.

Once you choose your bank, read the closing papers closely before you sign them. You cannot count on the bank keeping it exactly as you discussed. You must check it. If they changed the loan terms from what you had agreed to, do not sign the papers. Go back to negotiating or walk away. Even if you do sign the papers, you typically have the right to cancel without penalty for up to three days after you sign the loan papers.

Conclusion

You can fund your renovation project, car purchase, college tuition or any of a number of other large expenses by leveraging your home equity. Whether you just want to save money on the terms and interest on your mortgage or you need to fund a major expense, you can do so using a rate and terms refinancing loan, a cash-out refinancing loan or a line of credit. Analyze your credit and meet with loan officers after beginning your research at Loanry. You can find a home equity loan or line of credit that suits your budget, credit score, and ability to repay.