How to Use Your Home's Equity to Your Advantage

Houses, it seems, can be a work in progress. What appeared perfectly fine when we first moved in could quickly have its defects. From a bathroom that needs a larger shower to a closet that doesn't hold a complete wardrobe to a garage that needs extra storage, every homeowner knows that there's always room for improvement. But how to pay for it? Fortunately, homeowners who have a decent amount of equity in their homes can use their home to their advantage. By taking out a new mortgage, refinancing or getting a home equity loan/line of credit, they can explore their desires to improve their home decor.

• New mortgage: If you are buying a new home and are applying for a mortgage, think carefully about how much you want to put down, and how much you'll need to do home improvements. Be sure to discuss your goals with your mortgage lender - there may be specific programs or tools made available to you. For example, you might want to immediately get a home equity line so you are capable of doing improvements quickly. Or, you might want to put a lower amount down so you have cash on hand to complete renovations. Remember that if you improve your home, you should also be increasing your home's value - which means that you're also increasing your equity.
• Refinance: If you refinance, or take out a new mortgage on your home, be sure you're making it to your advantage. If your goal is to take out of your home's equity to pay for improvements such as remodeling or renovation, find out how much you can "cash out" safely. You want to have at least 20 percent equity in your home - otherwise you'll have to pay monthly mortgage insurance. Remember that by taking out the equity, you will not have as much invested in your home overall. If you sell your home quickly, you might not walk away with as much cash in your hand. Be sure to review the interest rate and term of your new loan - ideally, you'll be improving your situation somehow, either by lowering the interest rate or reducing the term.
• Home equity line/loan: Home equity lines of credits and home equity loans are popular methods for taking out your home equity. These, essentially, are second mortgages. If you have a home equity line, consider it almost like the credit you have available on your credit card - you can access your line of credit at any time, up to the limit. But you must repay it. A home equity loan is a straight loan that pays out once, and you will repay over a fixed period of time. Some homeowners keep their lines of credit for years and use them to fund not only their home remodeling projects, but also other large purchases such as cars or vacations because the interest is tax deductible. Consult your tax preparer before taking out such a loan - make sure you know and understand your options.