Best Way to Finance Home Improvements

Home improvements are a fact of life for home owners. In order to protect a home's value, periodic repairs and updates to the home need to be made. If you are a home owner who wants to (or needs to) make home improvements, then you may want to consider using the equity that you have earned in your home to finance your projects.

How Do You Earn Equity in Your Home?

There are three main ways to earn equity in your home. The first way is to pay for a portion of your home up front using cash. When you make your down payment you are buying equity in your home. If you have a traditional mortgage then you probably had to come up with 20 percent of your home's value for the down payment. If this is the case then you already have 20 percent equity in your home that you can cash out to finance your home improvements.
 
The second way to earn equity in your home is to make your scheduled mortgage payments. During the first 5 years of your mortgage most of your monthly payments will be applied to interest. However, as your mortgage ages a greater portion of your payments will be applied to the principal amount of the loan and you will start to earn equity in your home at a faster rate.
 
The final way that you can earn equity in your home is to allow your home to appreciate in value. The typical U.S. home increases in value by about three to five percent each year. However, if you live in a hot real estate market like Las Vegas, then your home may be appreciating in value by 11 percent a year or more.

Finance Your Home Improvements – Types of Home Equity Loans

If you want to cash out the equity that you have earned in your home to finance your home improvement projects, you have several options to choose from. Your first option is to take out a second mortgage. This option will allow you to borrow money that is worth your equity balance. This loan is secured by your home. Your second option is to take out a HELOC, or home equity line of credit. This is a form of revolving credit that is based on your equity balance and secured by your home. Your final option is to refinance your home with a 100 percent or a 125 percent mortgage. This final option is usually only offered to people with superior credit scores, especially the 125 percent mortgage.