When you are considering repairs to your home or a remodeling project, two questions come to mind first: What do we want to do, and how do we afford it? If you are thinking of remodeling your kitchen, for example, you may be thinking of a full tear-out or looking at a more limited replacement of your appliances and cabinet faces. And, once you have a basic idea of your project scope, you can decide how you want to pay for it. If the work is going to become a permanent part of the house, then a home equity loan might be a good fit for the financing.
Tapping your Home’s Equity
The equity in your home is the difference between the value of your home and the amount you owe on your mortgage. An appraisal is required to know the value for an accurate calculation, but you can get a basic idea by looking at online valuation sites, including the Federal Housing Financing Agency’s Home Price Index. Another way is to use the Zillow valuation available as part of the Money Management tools in our Online Banking platform. Simply add your home as an asset and the tool will provide the Zillow home value estimate free of charge.
Once you have an idea how much equity you have in your home, you can then have to determine how much of it you can borrow. You can apply to borrow up to 80 percent of your equity in Texas, and up to 90 percent in other states. But before you dive into amounts, be sure to consider what kind of projects is best for home equity loans.
Which Improvements Are Best for Home Equity Loans?
Some projects increase the value of your home, some repair damage, and some are definitely undertaken to increase your own comfort or enjoyment. Any of the three could be paid for with a home equity loan, but there are some basic considerations to look at first. Before you jump into a repair, be sure to look at your homeowner’s insurance. Depending on the cause of the repair, or the nature of the damage, some problems may be covered by your policy. Most repairs won’t be covered but it doesn’t hurt to check.
For projects that are meant to increase the home’s value, look into the time scale for your chosen project to provide a return on your investment. Also, consider whether you are thinking of keeping the house for the long term, or if you are making the improvements to increase value with an eye to selling. If you are planning to stay longer, then you will likely pay off the home equity loan long before the house is sold, but if you are thinking of selling, you will want to be sure that the improvements are of a nature to earn a ready return in the home’s sale price.
Projects that increase your comfort or enjoyment are usually best undertaken in a home that you plan to stay in, both to enjoy your upgrades, and to capture a return on your investment. This includes things like refreshing permanent interior fixtures and furnishings, adding conveniences, and installing green energy technology in your home. Such improvements enhance your enjoyment of your home, but do not carry a certainty of return, as not every house shopper is looking for the same features that we fancy.
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What to Have When Applying for a Home Equity Loan
When you decide that it truly is time for those upgrades, it is time to put preparation on the front end of your project. Before you decide that you need a loan, you will want to put together drawings, plans, and as detailed a list of supplies as you can, right down to screws and spackling paste. The more detail you can visualize, the fewer hidden costs you are likely to encounter. If you are working with a professional remodeler, then be sure to request as detailed a description of the project as you can get. You should be very clear regarding the expenses, and whether it is a preliminary estimate or a definitive estimate.
If the amount of the estimate exceeds what you want to pay out of pocket, then it warrants a trip to your lender. You will want to know a few things before you go. Be sure to check your credit score, and make sure that there are no incorrect items on your credit report that could slow the loan process. You are entitled to a free report annually. If you clear up any misinformation beforehand, you smooth the road for yourself. The credit score itself will not guarantee approval, but it will help you to see what the lending institution sees.
To avoid surprises, you should also know your debt to income ratio and your home’s value. These two numbers are among the most important to lenders, as they tell lenders how likely you are to be able to pay back the loan, and whether the loan is likely to be backed by strong collateral. Your debt to income ratio is the total amount of monthly debt payments you make, divided by your gross monthly income. Lenders vary, but generally, they like to see the number fall below 45%. That is not set in stone, and your institution can offer you more clarity on their requirements. But it helps to know where you stand as you begin the process.
You will also need a general idea of your home’s worth. As we discussed above, there are several ways to get an informal valuation of your home. During the home equity loan process, nearly all institutions will require an independent, professional appraisal of your home’s value. This may be paid by you up front or taken out of the loan amount.
Proper Prior Planning Prevents Poor Project Performance
As with every kind of project, home improvements are themselves improved when you plan ahead. The more detailed your project plan is, and the more carefully you examine your financial situation beforehand, the more likely the success. Planning ahead also makes getting your home equity loan a smoother process. When you know what to expect, your financing can move ahead smoothly, keeping you on time and on task.