Whether your home is brand new or you’ve lived there for as long as you can remember, chances are you have some thoughts on ways it can be improved.

 

If that’s the case, that would put you in line with the average homeowner. While 58% of homeowners remodeled their places in 2022 and 48% made repairs, 55% of homeowners said they had plans for projects in 2023, as well[i]. What’s perhaps more important to note is the median spend for those projects, which was $22,000 in 2022 (or $140,000 for the higher-end updates) and anticipated to average out to $15,000 in 2023 (or $85,000 for those bigger-ticket changes).

 

So, how is everyone affording all these home improvements? Before you tap into your 401(k) (do not tap into your 401(k)!), consider how tapping into your home’s equity — through a home equity line of credit (HELOC) or home equity loan — can help. Doing so is growing in popularity. HELOC applications were up 41% year-over-year in the third quarter of 2022, and home equity loan originations also saw a YoY growth of 47% last year[ii]. Here’s what you need to know.

 

What is a HELOC?

HELOCs, which stands for home equity line of credit, are essentially second mortgages that allow you to tap into your home’s equity for access to cash. You only pay back what you borrow from your given line of credit, and the amount you’ll be eligible for is determined by how much equity you have in your home (i.e., how much of the house you own compared to what it’s worth). 

 

A HELOC is a revolving line of credit that allows you to borrow (up to your limit) what you need for a specific amount of time (referred to as your draw period). During that time, you can even pay it back and then borrow from it again. In this way it works similarly to a credit card, but typically with higher borrowing limits and, usually, lower interest rates. Once your draw period is over, you will continue paying backing the principal plus interest over the repayment period.

 

What is a home equity loan?
A home equity loan works similarly to other loan products, but with your home equity being used as collateral. Like the HELOC, the equity that you have in your home will determine your loan value. Unlike a HELOC, a home equity loan comes as a lump sum, and you’ll pay interest on that full amount.

 

How to use home equity products for home repairs

HELOCs and home equity loans will come with different features — like interest rates, closing fees, and draw periods — depending on where you get yours from, but the steps for the application process will be similar.

 

1. Your credit score will be pulled and factored into your interest rate, so be sure you have a good one before applying.
2. The main application process is like applying for a mortgage. You’ll start by providing financial documents, likely including a mortgage statement, documents verifying household income, a copy of your homeowner’s insurance policy and a property tax bill.
3. The approval stage includes underwriting and an appraisal of your home, as it likely did for your mortgage.
4. Closing on home equity products may involve some additional closing cost fees depending on who you use, so be sure to ask about those before you get started. (Valley, for example, has no closing costs on home equity products under $350,000.)
5. Once approved, you’ll be granted access to your line of credit or loan, usually through checks or an ATM card.

 

Which is better, a HELOC or a home equity loan?

The HELOC and home equity loan are similar products. Both tap into the equity of your home to provide you with access to cash for home improvements. The difference with a HELOC is that the money is revolving during your draw period, and you only pay interest on how much you end up using. This makes it a good option if you aren’t sure how much money you’ll need to borrow (like, for example, home repairs). With a home equity loan you’ll receive a set loan amount, and you’ll pay interest on that amount no matter what.

 

Home equity products can be an excellent way to make improvements on your home to increase its value, by using the value of your home to finance those improvements. That’s pretty cool. Click here for more on Valley’s HELOC and home equity loan products or give us a call today.

 

 

 

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