How to Use Home Equity to Pay For Your Remodel

If you are looking to remodel your home with little to no money down there are a couple of options for you. Both of these options will utilize the equity that you have built in your home. First, unless you live in an area where home prices have appreciated greatly, you will need to have lived in your home for a few years. In a typical neighborhood your home may appreciate by three to five percent each year, allowing that much latitude on a yearly basis when it comes to a future loan against the house. Home equity loans and second mortgages are the easiest means of getting money together quickly to pay for home remodels or repairs. The second mortgage is a closed end home equity loan and the home equity line of credit is considered an open ended line of credit.

Remodeling with a Second Mortgage

The first of two ways to utilize your home equity to pay for a remodel is with the second mortgage. Second mortgages involve using the equity in your home to take out cash to use in home. This is done via mortgage lenders that will give you a loan for a specific amount based on how much equity you have in your home. Equity is the difference between what your home is worth on the market versus what you owe. Typically, if you have a loan-to-value ratio greater than 80 to 85 percent loan-to-value mortgage lenders will not extend this offer to you. The reasoning here is that some homes lose their value as time moves on. You as the homeowner can find yourself in a situation where due to the drop in value you owe more than the house is worth and that is too risky of a scenario for most lenders to extend credit under.

Remodeling with a Home Equity Line of Credit (HELOC)

Home equity loans are similar to second mortgages from the standpoint that it is an extension of credit based on your loan-to-value ratio. Here, you will be given a credit card with a limit based on how much you can safely use without busting your loan-to-value ratio. The difference, however, is that the credit card is much like a normal one in that it is a revolving line of credit. If you pay down part of the amount used, you have that amount to use again should you need it. As an added benefit, the borrower usually has a minimum payment to make instead of the fixed payment of the second mortgage.

Choose Wisely

Since the last thing that you want to have happen is a debt management problem, it may be wiser to go with a second mortgage. This way, you do not have the option of having an open ended credit line that could end up as a monthly debt payment that never seems to get paid off.