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Options For Home Improvement Loans
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Your home equity amount is the portion of your home that you have already paid for. If your home is worth much more than you still owe on your mortgage, you can use that equity to pay for home improvements or renovations.
But before you dip into your home's equity, consider the pros and cons of a home improvement loan. Read on to learn more about your options and how to get the most out of your home equity loan or home equity line of credit (HELOC).
Home equity can be a smart way to finance a renovation, especially as interest rates remain low. At the beginning of January 2022, the average home equity loan rate was 5.96% APR and the average HELOC rate is 4.27% APR.
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The interest you pay on home equity loans and HELOCs is tax deductible, but there are important limitations to understand before proceeding. To begin with, the money must be used to significantly improve the home securing the loan. It cannot be used for expenses such as personal expenses or paying credit card debt. Substantial improvements are changes or renovations that add value to the home, extend its life, or even adapt the home to a new or different use.
There are also limits on the loan amount when it comes to qualifying for an interest deduction. As of 2018, co-filers can deduct interest on up to $750,000 of qualified loans, while single or married filers filing separate returns can deduct interest on up to $375,000. for joint filers and $500,000 for individual tax returns.
Home equity loans and HELOCs both carry low interest rates because they use the home as collateral for the loan. However, getting the most competitive rates depends on your financial situation.
Those with good credit have access to the most competitive rates, while applicants with less than ideal credit scores pay a higher rate. In general, a credit score above 700 will most likely qualify you for a home equity loan, provided the other application requirements are also met.
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It's important to shop around and check rates from different lenders to make sure you get the best rate based on your financial history.
You can also work on improving your credit score before applying for a home equity loan or HELOC to improve your chances of getting a competitive rate. This can be accomplished by paying off outstanding debts, making regular payments on time, and disputing any negative items on your credit report.
Investing in your home is a good idea, whether you're looking to sell or create a more comfortable space for you and your family. If you're thinking of selling your home, renovations can help you sell it faster and for a better price.
While there are many benefits to taking out a home improvement home equity loan, it's important to remember that there are downsides as well.
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Perhaps the biggest downside to consider before signing on the dotted line for a home equity loan is the risk of losing your home if your financial situation changes unexpectedly. If you are late paying, your house could be foreclosed.
Consider your financial situation carefully before proceeding. This includes thinking about your employment status, your current level of debt, and other factors that may affect your ability to stay current on loan repayments. Be honest with yourself about whether your financial situation is stable enough to support regular long-term payments.
It may also be a good idea to speak to a financial adviser who can help you crunch the numbers and determine if a home equity loan is right for you. This type of professional can also help you develop a financial plan that will allow you to repay the loan requirements.
While house prices are currently on the rise, that may not always be the case. From time to time, there are substantial corrections or declines in the market. The Great Recession of 2008, for example, caused a housing crisis and many homeowners suddenly saw their mortgages upended - owing more than the fair market value of the home.
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A market downturn can be especially difficult if you have a lot of debt associated with the home, says Mark Charnet, founder and CEO of American Prosperity Group, a retirement and estate planning firm.
"If the value of the house drops to a point where the loan balance exceeds the value of the house, the bank can recall the loan and force you to pay all or a significant portion of it," Charnet says. "If you don't, the lender can likely result in a foreclosure action. Never lend so much as a 5-7% reduction in your home's value triggers this type of 'underwater' event."
With such concerns in mind, it's important to never borrow more money than you need when taking out a home equity loan or HELOC. It's also important to make sure that any renovations you undertake will actually increase the value of the home.
Using home equity for home renovations works best if you are making major improvements or have more
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