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Navigating Home Equity Options for Renovation Projects: Beyond the Basics

Tuesday, January 30, 2024

Dreaming of a new kitchen or a backyard oasis? You might be sitting on the key to making those dreams come true – your home equity. Let’s dive into how tapping into your home’s equity may open doors to renovating, repairing, and revamping your space.

Unlocking Home Equity for Renovations:

Think of your home equity as a nest egg that’s been quietly growing over the years. It’s not just a figure in your financial portfolio; it's a powerful tool that can fuel your home’s transformation. From chic bathrooms to sunlit extensions, your equity can be the ticket to these upgrades. If you're planning, like many people, to age in place in your current home, then your home equity can help you renovate and retrofit for the future too.

Specialized Home Equity Products for Renovation:

At Prosperity Home Mortgage, we specialize in finding financing solutions to fuel your renovation dreams. Our extensive range of home equity products is carefully designed to cater to your individual needs. With a deep understanding that every renovation tells a unique story, we're committed to providing the financing you need to bring your vision to life.

Home Equity Lines of Credit (HELOCs)1 :

  • Flexibility and Accessibility: HELOCs offer a flexible line of credit against your home equity. This means you can borrow what you need, when you need it, up to a certain limit. It's an excellent option for ongoing renovation projects where costs may be spread out over time.
  • Interest Rates: Typically, HELOCs have variable interest rates, which can change over the loan period. This can be beneficial when rates are low.
  • Repayment Structure: During the 'draw period', you may only need to pay the interest on the amount you've borrowed. After this period, you repay the principal and interest.

Cash-Out RefinanceOptions2 :

Conventional Cash-Out Refinance:

  • Suitability: Ideal for those with significant equity in their homes and good credit scores.
  • Loan Limits: Allows homeowners to refinance their mortgage and borrow against a percentage of their home's value.
  • Interest Rates and Terms: Generally offers competitive interest rates and various term options.

 

FHA Cash-Out Refinance:

  • Eligibility: May be accessible for those with lower credit scores.
  • Loan-to-Value (LTV) Ratio: Allows a higher LTV ratio compared to conventional loans, meaning you can borrow a larger portion of your home's equity.
  • Mortgage Insurance: Requires both upfront and annual mortgage insurance premiums.

VA Cash-Out Refinance:

  • For Veterans and Military Service Members: Exclusively for the benefit of veterans, active-duty service members, and certain members of the National Guard and Reserves.
  • Benefits: Often allows for up to 100% LTV, enabling veterans to access more of their home equity.
  • No Mortgage Insurance: Unlike other options, it doesn't require mortgage insurance, which can significantly reduce monthly payments.

Real-Life Applications of Home Equity Products3:

Scenario 1: Ongoing Renovation Projects – Utilizing a HELOC

The Johnsons' Kitchen and Patio Upgrade: The Johnson family wanted to renovate their kitchen and add a new pool and patio over two years. They chose a Home Equity Line of Credit (HELOC) for its flexibility. With the HELOC, they could draw funds as needed, paying interest only on what they used during the draw period. This option was perfect for their phased project, allowing them to manage costs effectively as the renovation progressed.

Scenario 2: Comprehensive Remodel – Conventional Cash-Out Refinance

The Thompsons' Full Home Makeover: After years of saving, the Thompsons decided to undertake a complete home makeover. They had substantial equity and good credit, making a conventional cash-out refinance an ideal choice. By refinancing their mortgage, they accessed a lump sum to cover their extensive renovation costs upfront, securing a competitive interest rate and a manageable repayment term that aligned with their long-term financial goals.

Scenario 3: Extensive Renovations with Lower Credit – FHA Cash-Out Refinance

Mr. Murphy's Historic Home Restoration: Mr. Murphy, a homeowner with a modest credit score, dreamt of restoring his historic home. An FHA cash-out refinance was a lifeline, allowing him to borrow against a higher LTV ratio despite his credit situation. The process was straightforward, and although it included mortgage insurance premiums, it enabled him to fund his dream restoration project while improving his home's value.

Scenario 4: Veteran’s Major Remodel – VA Cash-Out Refinance

Sgt. Miller's Accessible Home Conversion: As a veteran, Sgt. Miller sought to remodel her home for accessibility. She opted for a VA cash-out refinance, which allowed her to borrow up to 100% of her home equity. This choice was particularly beneficial, as it didn't require mortgage insurance, and she could access more funds compared to other options. The remodel included a wheelchair ramp and a renovated bathroom, significantly enhancing her quality of life.

Budgeting Wisely:

A golden rule in renovation is budgeting smartly. It’s not just about how much you can borrow; it’s about aligning it with your project's scope. Websites like HomeAdvisor can provide you with estimates and ideas to plan effectively.

When considering home renovation projects, it's essential to understand their potential return on investment (ROI). According to the Remodeling 2023 Cost vs. Value Report (www.costvsvalue.com), certain projects stand out for their high ROI.

One of the top performers is the HVAC electrification conversion. The average project cost is about $17,747, and it typically recoups 103.5% of this investment upon resale. Similarly, garage door replacements, costing on average $4,302, can yield a 102.7% recoup in value. Manufactured stone veneer, another popular project, averages $10,925 in cost and can recoup around 102.3%.

Other noteworthy projects include entry door replacements using steel doors, with an average cost of $2,214 and a recoup rate of 100.9%, and vinyl siding replacements, which cost about $16,348 and have are coup rate of 94.7%.3

First Steps to Your Renovation Dream:

Eager to get started? The first step is a chat with our Mortgage Consultants at Prosperity Home Mortgage. We’ll help you figure out how much you can borrow against your home equity and guide you on your financial path for your project.

Wrapping It Up:

Turning your home into your dream space should be an adventure, not a hassle. With the right use of home equity, your renovation project can enhance not just your home’s value but your lifestyle too. At Prosperity Home Mortgage, we're here to light the way. Let’s talk about unlocking your home's potential and bringing those renovation dreams to life!

1 A home equity line of credit may not be the right option for all borrowers. Not all borrowers will qualify. Contact your mortgage consultant to discuss each of the financing options available to you. Home equity lines of credit provided by third party. Some and/or all qualifying criteria may be set by independent third party. Borrowers will be subject to qualification and must satisfy all underwriting requirements and conditions.

2 By refinancing an existing loan, your total finance charges may be higher over the life of the loan.

3 Interest rate and annual percentage rate (APR) are based on current market conditions as of 1/25/2024, are for informational purposes only, are subject to change without notice and may be subject to pricing add-ons related to property type, loan amount, loan-to-value, credit score and other variables. Estimated closing costs used in the APR calculation are assumed to be paid by the borrower at closing. If the closing costs are financed, the loan, APR and payment amounts will be higher. If the down payment is less than 20%, mortgage insurance may be required and could increase the monthly payment and APR. Contact us for details. Additional loan programs may be available. Accuracy is not guaranteed and all products may not be available in all borrower's geographical areas and are based on their individual situation. This is not a credit decision or a commitment to lend.

3 These examples highlight just a few of the potential renovations that homeowners might consider for both enhancing their living space and improving the value of their homes. For more detailed information and a comprehensive list of projects, the complete data from the Remodeling 2023 Cost vs. Value Report can be downloaded free at www.costvsvalue.com. © 2023 Zonda Media, a Delaware Corporation .*

*Prosperity Home Mortgage, LLC does not offer financial advice. This information is provided for informational purposes only and does not constitute legal, tax, or financial advice.

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