How to Finance Your Next Home Improvement Project

Home improvement projects are a fantastic way to increase your home’s value. Whether investing in a kitchen upgrade, a new bathroom, a new roof installation, or a home expansion, these projects can add tens of thousands – if not hundreds of thousands – of value to the property.

Unfortunately, few homeowners have the funds on-hand to cover these upgrades. Many use the financing available from retailers and installers, but that is not always offered. In some cases, financing is only offered at a high interest rate.

Some folks opt to put projects on a credit card. But, if not properly managed, that can lead to thousands of dollars in interest charges, as well as a potential ding on a credit report for any missed payments.

Home equity presents an accessible and low-stakes financing option for expensive home improvement projects. There are a variety of ways to access home equity, including a HELOC, a home equity loan, and a cash-out refinance. Before borrowing against a home, however, a homeowner will need to have built up some equity in the property. Then, they can borrow the funds they need for a home improvement project. But how much equity can I borrow as a homeowner?

Generally speaking, the maximum amount of you can borrow with a home equity loan will depend on how much the home is worth. When financing a home improvement project, you’ll need to pay attention to your home’s loan-to-value ratio, or LTV. This ratio compares the size of your mortgage to the value of your home. For example, if your home is worth $200,000, and you put 10% down on the property, you have a mortgage for $180,000. In this case, your LTV ratio is 90%. This means the loan itself makes up 90% of the home’s total value.

When it comes to taking equity out of a home, most lenders look for an LTV ratio of 80% or less. So, returning to the above example, you’ll need to have paid $20,000 into the home before you have access to home equity. Then, if you take out a home equity loan, you’ll have access to any and all funds before maxing out at 80% on your LTV.

There are other ways to access home equity. For example, a HELOC provides ongoing access to equity, similar to a credit card. This is a great option for people who will have ongoing costs associated with a home improvement project, like a kitchen remodeled in stages. Like with a home equity loan, you’ll need a certain amount of equity built up in the home before having access to a HELOC.

Many homeowners also turn to cash-out refinancing when in need of a large monetary sum. In this situation, the first lien is entirely replaced with a loan amount that is greater than what you owe on the home. The difference is then delivered to the homeowner in a single lump sum. But, again, the homeowner will have needed to build up equity in the house before option for a cash-out refinance.

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