Even though homeownership rates continue to fluctuate, in the fall of 2022, home equity hit an all-time high in the U.S. The average American now has $300,000 in equity!
Equity in real estate is a vital financial tool that allows you to decrease your debt and increase your assets. It’s one of the best ways to create financial stability and generate wealth. Additionally, home equity makes borrowing money easier. You can qualify for more money with lower interest rates.
A way to increase your home equity is by enhancing your property, which can be a fun process where you get to exercise your creativity. In this post, we’ll explore how to build home equity with home improvements.
What Is Home Equity?
Home equity is the value of the home you own. Another way to think of it is the difference between your home’s market value and how much you still owe on your current mortgage.
For example, if you bought your home for $300,000 and made a down payment of $75,000 (plus closing costs), you initially had 25% equity.
Now, your home is worth $400,000, but the amount of money you still owe is $100,000. So the amount of equity you have is $300,000, or 75%.
HELOC Loans and Building Equity
If you want to use home improvements to build equity and add value, several financing options can help. It’s best to look into different home loans rather than personal loans – you’ll get better interest rates and repayment terms.
One option is a home equity line of credit (HELOC) or a second mortgage. This allows you to borrow against the value of your home. HELOCs are revolving lines of credit like credit cards with variable interest rates and variable minimum monthly payments.
Another option is a home equity loan, which is an upfront, lump-sum payment. It has a fixed rate and fixed monthly payments.
Aside from these differences, there are many similarities between HELOCs and home equity loans, such as:
- Loan term between five and 30 years
- Minimum 20% equity to be eligible
- The lender requires a credit score of 600 or greater
But did you know there are tax benefits of owning a home, too? For instance, if you take out a HELOC for a remodeling project, up to $750,000 in interest is tax deductible!
For those that need a higher loan amount, consider a cash-out refinance. This type of refinancing replaces your original mortgage with a bigger one. You’ll receive a cash payment for the difference between the value of the loan and the amount you owe.
What Improvements Build Home Equity?
Using home equity for renovations works best when you make significant improvements or undertake several renovation projects. Here are some home improvement projects that homeowners can use to build equity.
New windows don’t just increase property value; they also lower your energy bill. So although they aren’t cheap to install, in the long run, they’ll save you money and make it easier to heat and cool your home.
Curb appeal is critical when assessing your home’s value. An excellent way to better your home’s curb appeal is with professional landscaping.
A well-maintained lawn goes a long way in adding equity, and you don’t even need to spend thousands on intricate designs or features. Instead, invest in well-laced shrubbery and some trees.
Bathroom upgrades under $10,000 are ideal because they provide significant returns when determining your home’s value. You can update the bathtub, shower, and sink but not remove or replace them. Look at some remodeling magazines for inspiration on bathroom renovation ideas you’ll love.
Further, consider a small bathroom remodel to put your best foot forward for selling.
Outdoor Deck Addition
Outdoor spaces are homeowners’ top priority, especially with our gorgeous Florida weather, so a deck is an excellent idea. Plus, you can build a top-quality deck for under $10,000. Enjoy some outdoor entertaining while building equity!
Any real estate agent will tell you that kitchen remodels are popular with potential buyers. A kitchen remodel isn’t cheap, but if you choose semi-luxurious finishes and a spacious floor plan, you can quickly recoup the costs because the return on investment is high.
New Garage Doors
As with landscaping, your garage doors add to your home’s curb appeal. If the doors are dirty or worn out, you want to freshen them up. For doors with significant damage, replace them.
Homeowners love hardwood floors. They are easier to clean than carpets and provide charm to the home’s interior.
If you have an older home, you may already have hardwood floors underneath the carpet that you can refinish. However, installing new hardwood floors is also an option.
What Home Improvements Don’t Build Equity?
Of course, not all home renovation projects will build equity. Here are five home improvements to skip.
Turning your garage into an office or bedroom might seem ideal. However, this home remodeling project doesn’t necessarily add value to your home since many prospective buyers don’t want to forgo the garage for additional space.
Hot Tubs and Pools
Hot tubs and pools are expensive to install. They also have high maintenance costs. Thus, adding these features may turn many buyers away because of the maintenance and insurance expenses. Not to mention, there are safety concerns.
Although a sunroom may be the top selling point for a specific buyer, you’ll likely lose money on this project with the general buying crowd. You can build a sunroom for your own enjoyment, but building one doesn’t necessarily increase home equity the way you might think.
Everyone tends to have a personal preference when it comes to wallpaper. So if you want to increase your home’s resale value, don’t go crazy on wallpaper.
Instead, stick to neutral paint colors. This way, the new owner can decide how to best decorate for their taste.
The number of bedrooms is the primary driver of your home’s sales price. Thus, removing a bedroom will drastically lessen its value. It will also reduce the home’s visibility to potential buyers when searching online.
Are You Ready to Sell Your Home?
Ready to sell your home? Contact me to start the process. I was born and raised in Tampa, and I’ve been a real estate agent for almost 20 years with vast market knowledge. I can assist you with both the home-buying and selling processes!