This Family Chose Renovation Over Moving. Here’s How to Use Home Equity to Take Your Current Home From Drab To Fab

A photo to accompany a story about renovating your home Courtesy of Marina Vaamonde
Marina Vaamonde (pictured with her family) needed more space at home. But due to a challenging market, the Vaamondes chose to renovate instead of move.
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When Marina Vaamonde and her family began shopping for a new home last year, they ran into a common problem in today’s real estate market — low inventory and high prices.

Vaamonde wanted an upgrade of their Houston, Texas, home with more space for her family and a workspace for those days when she was working from home. But finding something that met their needs in their current area proved difficult. The Vaamondes decided to renovate their current home to meet their needs.

Remodeling allowed them to stay in the same neighborhood close to the kids’ school and was a smaller financial commitment than buying a new home. “I am glad that we stayed and remodeled and didn’t just jump into buying something,” Vaamonde says. 

The Vaamonde’s experience isn’t unique. A pandemic-fueled rise in remote work increased the need for more space at home. With many homeowners unable or unwilling to pay today’s elevated prices to move to a larger home, more homeowners have turned to renovating their existing space as a solution. With home values skyrocketing, homeowners are sitting on a well of tappable equity that can be used to finance a home remodeling project. 

But before you jump into a big renovation thinking it will be cheaper or easier than purchasing a home, here’s what you’ll need to consider and how to fund the project. 

What to Consider Before Remodeling

Having a clear understanding of your long-term goals is an important first step when making major changes to your home. “What are your plans with this home after the renovation is complete?” asks Angela Moore, CFP and founder of Modern Money Education, a financial education firm. 

If you plan on living in your home long-term the upgrades you invest in may be different than if you plan on selling your home in the next few years or renting it out. Regardless of what specific parts of your home you want to remodel, the planning process will be similar.

Budget Extra Money

Supply chain disruptions and labor shortages have increased the cost of building materials. When pricing out a remodel, expect to pay more than you would have a few years ago.

But even under normal circumstances, you’ll want to budget for the unexpected when upgrading your home. “You always have to have a buffer, because there’s always some unforeseen thing that pops up,” Moore says. Vaamonde is also a real estate investor and always plans for renovations to cost 20% to 25% more than the quoted price.

Consider How Long You Can Go Without the Space

There is a cost to remodeling a home that goes beyond the sticker price. Take into consideration the hassle and potential expense of not being able to live in your home or use certain areas for an extended period of time. You may have to deal with noise, dirt, and people coming in and out of your home all day.

Given the additional delays you’re likely to experience right now, it may influence your renovation decisions. Vaamonde wanted to update the kitchen as part of the renovations, but ended up deciding against it. “When we started looking at pricing and how long I possibly would be without a kitchen. I just couldn’t push myself to go that route,” Vaamonde says. Just replacing some flooring, updating the bathrooms and creating a small workspace in a hallway took four months, she says.

Find a Good Contractor

Vaamonde hired a contractor she had worked with before. “What I like about him is he’s not the cheapest, but I know that he’ll get the work done well,” she says. She was also aware going into it that the project would probably take longer because this contractor is typically in high demand and is managing multiple projects at the same time. But it was worth it because she felt she could trust him to get the job done without any additional supervision.

When shopping around for a contractor, look for reviews and see if you can find references from former clients. If possible, find pictures of previous work or go and see it first hand. It’s extremely important to research a contractor before giving them any money or signing a contract, Moore says. Ask lots of questions about the cost, timeline for the remodel, and whether or not you’ll need to obtain permits.

How to Use Home Equity to Pay for Renovations

As home values have surged, more homeowners have the option of using their home’s equity to finance renovations

Converting your home’s equity into cash can be a great way to pay for a remodel if you don’t have the extra money on hand or don’t want to tap into your savings. Common options for borrowing against your home equity include:

There are pros and cons to each type of financing, so it’s important to understand your options. “When looking at financing, there are a lot of different ways to do things. And the right way just depends on your situation,” Moore says.

A cash-out refinance replaces your existing mortgage with a larger home loan and you pocket the difference. When interest rates are lower than your current mortgage rate this makes more sense because you’re lowering your interest rate on the entire loan amount. 

When interest rates are higher than your existing rate, you may only want to keep your mortgage and take out a smaller secondary loan. A home equity loan allows you to keep your existing mortgage, while borrowing against your home’s equity with a separate fixed-rate loan.

A HELOC is similar to a home equity loan except it will usually have a variable interest rate. However, with a HELOC you won’t get the money in one lump sum. Instead, you’ll have a set limit you can borrow and you can withdraw the money as needed. This way you’ll only pay interest on the money you withdraw, rather than paying interest on the entire amount from day one.

Pro Tip

Build room into your renovation budget for unexpected expenses and delays, especially given the supply chain disruptions and labor shortages we’re currently facing.

Consider the Risks of Borrowing Against Your Equity 

Anytime you borrow money to pay for home renovations it’s important to understand the risks and to consider all of the costs. 

When you use your home as collateral to borrow money it is considered a secured loan or secured line of credit. This type of lending is less risky for the bank and typically has lower interest rates. The downside is, if you default on the loan, you could lose your house. Also, if you increase the amount of money you’re borrowing, you’ll have a smaller profit on the sale or in a worse case scenario, could owe money at closing if the housing market drops (although experts don’t expect home prices to crash).

When comparing lenders and weighing the advantages and drawbacks of each type of home-equity financing, take a look at the overall cost — not just the interest rate. The upfront fees, or closing costs, associated with home-equity financing can be 2% to 6% of the loan balance. Depending on how much you’re borrowing, that can be thousands of dollars in fees. By comparing offers from a handful of lenders you can ensure you’re limiting your out-of-pocket fees while getting the best rate possible.

Some home equity lenders waive the closing costs or give lender credits. Be sure to ask about this when shopping between lenders.