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Options for Financing a Home Improvement Project

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Many homeowners have big ideas and dreams about home improvement projects.  Perhaps you have finally decided to move forward with a creating your chef’s kitchen or a spa-like master bathroom, or even upgrading your home’s siding or roof.  An important factor to consider before you begin the work or order any materials is how the project will be financed.

According to an article in RealtorMag published by realtor.com, “One-third of affluent homeowners—those who earn at least $100,000 a year—plan to use credit cards to pay for home renovation projects…”, according to a survey conducted by a division of Sun Trust Banks.  This option may be a perfect solution for a homeowner who has the means to pay off the balance as soon as it is due, while earning reward points offered by their credit card company.  However, many homeowners may not be able to pay off a large sum within that time frame and would, therefore, begin to be charged possibly double digit interest on their balance.

A home equity line of credit may be a wiser decision for some homeowner’s needing to finance their renovations.  Often, the interest rates are significantly lower and possibly tax-deductible.  Homeowners with home equity could consider a HELOC or even a cash-out refinance, “where borrowers refinance for more than what they owe on the property and then take the difference out in cash.” These options can come with refinance fees or closing costs which would need to be factored into any comparisons.   Nevertheless, it is advisable to fully investigate all financing options to ensure you are not paying more than you need to complete your home improvement project.

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Photo Credit:  Mateusz Kapciak
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Building Wealth: An Unmistakable Benefit of Buying a Home

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When deciding to buy a home or rent a home, the lists of pros and cons for buying or renting can be overwhelming.  Depending on the current market conditions, it may seem obvious which choice is more economical.  When rates are low and prices are low, buying a home appears to be the best choice.  However, as mortgage rates and housing prices begin to increase, renting a home is an option that might seem more economical.

However, an important factor should be considered before deciding to rent instead of buy, even as mortgage rates increase and home values begin to rise.  According to an article published by Realtor.com, The Misleading Math Behind the Rent vs. Buy Calculation, “…homeownership is a critical building block of household wealth. Owning a home is a key reason why the median net worth of a homeowner is almost $200,000 while the median net worth of a renting household is just over $5,000.”

A closer look at the comparisons between the cost of buying versus renting reveal some long term advantages to owning a home and uncover some details worth considering.  It is common knowledge that part of each monthly payment go toward the equity a homeowner has in their property with a fixed 30 year mortgage. Additonally, as the home owner gets further into the lifetime of the mortgage, the amount they are paying into their own equity begins to increase. An important detail to note, which may not be a common consideration, is that the payment amounts are actually “frozen” for the lifetime of the mortgage.  It is unlikely that a renter could expect such a guarantee.

Homeowners know what their housing payment will be for the next 360 months, not many landlords are willing to lock their monthly rental rate beyond a year or two.  Further, homeowners are, in essence, locked into a “forced savings plan” where they pay some percentage to their own equity each month. This reason, alone, is the primary factor which makes it more feasible for homeowners to accumulate wealth.

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Photo Credit:  aag.com

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U.S. Homeowners Saw Significant Equity Growth in 2016

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Many American homeowners can look back on 2016 as a year of growth.  Specifically, growth in the amount of equity they now have in their home.

According to a report released by the Federal Reserve, the average American homeowner gained just over $12,000 in equity from September 2015 to September 2016.  In some of the hot markets of the U.S., homeowners may have seen upwards of $25,000 in equity growth during that time frame.7187826211_2c8a407e58_o

Factors such as the low interest rates that continued to be available throughout 2016, coupled with the low inventory of homes for sale, drove the value of homes upward. In an article published in The Chicago Tribune by Kenneth R. Harney, additional factors for increased home values are detailed.

Harney goes on to suggest what homeowners with significant equity in their homes might choose to do with it.  Homeowners who decide they want to tap into the equity instead of letting it continue to grow are advised to use the funds, which might be accessed via a home equity credit line, in a responsible manner such as home renovations, consolidation of credit card debt or student debt.  Since rates are expected to rise in 2017, homeowners considering a HELOC as an option might want to act sooner rather than later.

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Photo Credit: Diloya

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