many people think home ownership Step by step — a starter house, an upgrade or two, and the elusive “dream house.”
What does your dream home look like? Do you have an HGTV-level kitchen, a spa-like main bathroom, or a patio worth swooning over?
You might think your home is on a hill, but what if your current four walls hold the potential for your forever home?
You may not have to move to make your dream home a reality. If you love your area, have built a close-knit community, and find yourself staying, then a few modifications might make your home work for you. And why uproot your life?
How can you pay for the change you want now that you’re excited to stay the way you are?
Yes, major home modifications can be expensive, but there are tools you can pull out of your back pocket. Home Equity Line of Credit (HELOC).
- What is HELOC?
- how does that work?
- Are there any drawbacks to consider?
- Can you help me realize my dream home?
Check it out!
First, put a price tag on your dream home
Before you combine your bank and loan, you need to know the price of your dream home. All jobs vary by region and aspirations, but here are some national numbers to consider.
Houzz & Home in 2022 investigation A homeowner planning a high-budget renovation is planning to spend $75,000 on the project, it turns out.
If you’re planning to change the structure or foundation of your home, demolish your kitchen, or remodel your bathroom, check out Relator.com. I think You could easily spend over $76,000 to make it all happen. Depending on his taste for brass hardware, custom cabinetry, and top-of-the-line appliances, even a full-scale kitchen remodel can cost him $50,000 or more.
So how much do you need?
Consider the following questions.
- What is your “dream home”?
- What features of your home do you really like and want to keep?
- What would you like to change in your current home?
- What are your top priorities on your list of desired changes?
Before you hunt around for contractors or fall in love with marble tile, make sure you have a plan. Once you have a clear picture of what you need and how much it costs, you can focus on funding opportunities.
Learn about HELOC!
What is HELOC?
HELOC leverages home equity to generate specific lines of credit that can be used to pay for home upgrades and renovations.
HELOCs are different from other home improvement financing opportunities because the funds cannot be received in a lump sum. Rather, you have access to a pool of cash that you can utilize as needed.
Think of HELOC like a home improvement credit card. They have two basic features in common.
- You can withdraw from HELOC over time as needed. Very flexible.
- The funds available are capped.
- The amount borrowed must be repaid with interest.
Let’s say your card has a $20,000 credit line. You probably won’t spend it all in one place. Instead, it could be used for groceries, utilities, entertainment, travel, and more. The same idea applies to his HELOC. Most renovations require capital at various times, depending on the specific project, labor required, trade costs, materials, etc. So it’s nice to be able to use only the funds you need.
With a HELOC, you’re renting against the value of your home, so it’s most useful if you’ve built up a substantial fortune.
Here’s a quick refresher on what “fair” means. To calculate your home equity, subtract the value of your home from what you owe (your mortgage balance). So if your home has skyrocketed in value over the past year, you may own more stock than you think.
Let’s say your house is worth $550,000 and your mortgage is $350,000. In this case, you have an asset of $200,000. HELOC gives you access to much of that equity (more on that below) to upgrade your dream home.
HELOC nuts and bolts
Like any financial tool, HELOC has a lot going on. Getting a HELOC is a much more complicated process than opening a new credit card. So how do we secure these loans?
First, you need to understand how HELOC works.
HELOC has two general phases:
- selection period and
- repayment period
Most banks offer a withdrawal period of 10 years. During that period, you can use the allocated funds as needed. So if you want to wait a few years to upgrade your kitchen and button up your landscaping and curb appeal, the money will be waiting for you!
During this time, you will only have to make small interest-only payments, but if you have the funds, you can start paying off the principal as well. Plus, as a bonus, you don’t have to pay interest on money you don’t use. So if you have $100,000 available and only use $80,000, you don’t have to pay interest on the remaining $20,000. This feature makes HELOC a flexible funding tool.
Then comes the repayment period. It often lasts about 20 years. During this time, you will have to repay the loan in full based on the current interest rate. Interest rates fluctuate, so increase your balance when interest rates are low.
Three qualifications required for HELOC
How do you access this revolving source of funds for your dream home? Here’s how to qualify for HELOC.
1. Determine if your home has enough assets
Most lenders won’t give you access full Equity in your home. Instead, it uses the loan-to-value ratio to determine how much you can borrow.
This can be calculated by dividing the mortgage amount by the house price. Then convert the result to a percentage.
Let’s put in the numbers. If your house is worth $550,000 and you owe $350,000, your loan to value ratio is 64%. But some lenders say he will reach as high as 80% or more.
well how much can you actual borrow?
It requires a little more math (or HELOC calculator,Either one is fine).
Assuming the value of the house and the amount of the mortgage are the same, let’s assume that your good credit makes the ratio of the loan value to 80%.
- First, multiply the home value by the loan value ratio. In this case, $550,000 x 0.8 equals $440,000.
- You then subtract $440,000 from your outstanding mortgage balance of $350,000 to get a line of credit up to $90,000. You can be sure that you will have a beautiful new kitchen.
With home prices at all-time highs, you may be amassing more wealth than you thought. This situation can be a double-edged sword.
On the one hand, if you have more equity (and meet all the other requirements), you can qualify for a higher HELOC than expected, potentially leading to an incredible dream home. there is.
Conversely, you should be careful about how much money you spend on home renovations in case the value of your home drops significantly. Most of the time, you don’t want to put more money into a home than it’s worth in the end.
2. Know your debt-to-income ratio
A HELOC has many ratios and one of the most important qualifications is the amount of debt.
The debt-to-income ratio shows how much of your monthly income is spent on debt. If the number is too high, you may not be eligible to take on any more debt. Each lender sets its own criteria, but most look for numbers below 40%.
3. Understand your credit score
Much like securing a mortgage, lenders use credit scores as a metric for granting HELOCs. Again, the exact numbers vary by lender, but he must be in the low 600s to be considered, and the higher the credit score, the higher the rate.
4. You can “lock” your HELOC
One interesting point is that once you’ve done the housing project you had in mind, you may want to convert the used portion of your HELOC into a home equity loan and “lock in” the rate. This strategy is especially useful if you want to pay off your debt quickly, but you don’t want interest rates to change over time. Home equity loans are typically 5 to 20 years, with a portion of the payments turned into principal each month.
Another benefit is that even if you didn’t use the full amount of HELOC, you can still use it in the future. So, if your HELOC is $90,000, you have a $50,000 kitchen renovation, and you lock this amount in as a home equity loan, you still have $40,000 of his HELOC available for future projects.
When HELOCs aren’t so dreamy
We don’t want your dream home renovation to turn into a nightmare, so be aware of common mistakes homeowners make with HELOC.
you are not ready to pay
Unlike most credit cards, there may be an initial cost to establish a HELOC. These fees may be less than other routes, but you should have enough cash to cover title search, evaluation, and other closing costs.
Remember, HELOCs allow you to use your home assets as bank collateral. Second, they often place a lien on your home giving them the right to take it if you are unable to make payments. If so, you don’t want to use HELOC.
I didn’t take floating interest rates into account.
Like major mortgages, many loans may have fixed interest rates. So no matter what happens during the life of the loan, you will pay the same fixed interest rate (unless you refinance).
However, most HELOCs use floating interest rates. Interest rates can fluctuate, so the amount you pay can change dramatically over time. This is especially important given the current economic climate, where interest rates have risen and may continue to rise.
You don’t think “big”.
HELOCs involve initial costs, underwriting, and other administrative processes, so it is imperative that you make the most of this avenue. A common mistake is to use her HELOC for minor fixes instead of major renovations.
I don’t want to go through the trouble of setting up a HELOC just to buy a few cans of paint and a new light fixture. It often comes in handy for more important projects like adding a pool to your backyard, creating an open-concept main floor, demolishing your kitchen, or other large-scale projects.
you took out too much.
HELOC helps fund larger projects, but we don’t want to face the problem of over-borrowing. Then you run the risk of spending more than the house is actually worth. I don’t want to spend more money than necessary. Especially if you plan to use the house stock in the future. Or, if the value of your home drops and you need to sell it, your mortgage could fall behind.
From HELOC to Dream Home
Experts are anticipating a cooling-off period for the housing market, but you may want to stay where you are. If you don’t want to move but you don’t like your house, you can renovate it and it will become your dream home.
HELOC is one option to fund this effort. Carefully consider the pros and cons of this vehicle when deciding how best to make this dream come true.
All that’s left to do is set up a “dream house” board on Pinterest and look for great inspiration.
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