When the weather starts heating up and spring fever kicks in, we’re often ready for a getaway. But short of being able to escape to the tropics—which has been hampered in the last year by COVID-19—many homeowners are turning to their own properties to create the perfect escape right at home.
Enter: Pools, patios and more space.
“Through COVID lockdowns, we saw a lot of interest in investing in outdoor spaces like patios, since so many were spending more time outside but at their own homes,” said Josh Denton, senior consumer product manager for BOK Financial®.
The other big improvement trend: adding on home offices. With so many workers going remote (and staying there in some cases), the demand for additions has been abundant.
Since low mortgage rates will likely continue, many homes with upgrades are being sold for more than their value (and quickly), and inventory is low. As a result, more homeowners are staying put and opting to make significant upgrades to their existing property.
Options for financing home upgrades
While purchasing a new home might be out of reach based on inventory levels, homeowners are choosing to invest in their existing home and boost its value.
“Homeowners are using improvements to their home to also improve their quality of life,” said Denton. “The outcome is also higher home values.”
One way that these improvements are being financed is through home equity lines of credit (HELOC), which are popular for financing the work being done. But knowing the options (and how they work) can be hard to navigate.
“One of the things that consumers have a hard time understanding is what equity is,” Denton said.
For example, when you have a $300,000 home and your outstanding mortgage is $200,000, the $100,000 differential is considered equity. “A HELOC is a tool you can use to borrow against a portion of that $100,000 in equity,” he said.
One of the main advantages of a HELOC is that it is a low-cost option for personal borrowing when you compare it to an unsecured personal loan or adding high-interest debt to a credit card balance.
“The real benefit with home equity borrowing is home improvement,” Denton said. “You’re taking money from your home and reinvesting it into your home to enhance its value.”
What you should know
As with any form of borrowing, there can be drawbacks.
“Because it’s a line of credit, it’s based on a variable interest rate, which can sound concerning,” Denton said. One way BOK Financial helps offset this is by offering qualified borrowers a fixed rate option within the HELOC.
Another drawback to a HELOC is the risk of borrowing against your home. “There is risk involved whenever your home is being used as collateral,” Denton said. “That’s where you have to be sure that you’re using the HELOC as a responsible form of borrowing.”
It’s also important to note that the amount that banks will lend may change as a result of rising home prices.
“The housing market is strong, which means home prices are appreciating. On one side of the coin, it’s an opportunity to have more equity than before, but as we’ve seen in the past, there is a risk of a cooling off period,” Denton said. “Financial institutions follow these trends closely and adjust accordingly by tightening up the credit requirements or lowering the percentage that can be borrowed.”
Other financing options
Another option for homeowners wanting to invest in home improvements is through a cash-out refinance. This replaces your existing mortgage with a new home loan for more than your current mortgage. The difference is then provided to you in cash to be spent on home improvements, debt consolidation or other financial needs.
“A cash-out refinance is only possible if you have enough equity in your home," Denton said. Homeowners are using this money for improvements such as solar energy upgrades, as well as more cosmetic improvements.
Homeowners are also turning to HELOC loans and cash-out refinances for other goals, such as paying off high-interest credit cards or student debt, or using the money to pay for classes or certifications.
But still, home improvements are what the vast majority of HELOC loans and cash-out refinances are used for, by reinvesting money into your home to build more value.
Who will do the work?
While you may be ready to tackle your next home improvement project, there are a couple of steps to take before securing funding and a finished product. The first? Finding someone to do the work if it’s a little out of your DIY expertise. A qualified contractor can ensure the work is done right so that your investment isn’t wasted.
“It’s important for homeowners to do their research and hire a qualified professional to make lasting and correct changes in a home,” said National Association of Home Builders Remodelers Chairman Steve Cunningham, CAPS, CGP, a remodeler from Williamsburg, Va. "Whether it's a small project or a whole house remodel, a qualified professional remodeler can help homeowners create a space that works for them."
Here are some tips for finding the right fit for your project:
- Know your plans. You should have a pretty good idea what you want when you contact a contractor for a quote. While some contractors will offer recommendations for improving on those plans, you still need to know where you want to go.
- Gather recommendations. Based on the plans you have in place, it’s time to do your research. Ask friends, coworkers or family members if they have recommendations for contractors in the local area. And if you don’t have those kinds of connections, a realtor or local homebuilder’s association can help.
- Ask questions. When you meet with multiple contractors to find the right fit for your project, it’s crucial to ask questions such as: Do you offer a warranty on your work? What is your timeline for completion? Does your quote include everything or have any contingency funding? Do we need special permits?
- Ask to see work. It’s completely within your right to ask the contractor to see examples of his or her work—whether a full home build or renovation. Doing so will give you a better feel for the work the company does.
- Check licensing. Protecting your investment is important, so making sure the contractor you select has the right licensing for the work being done is a crucial step in the process. For example, you want to make sure they have insurance to protect you from liability in the event that someone on their crew is injured in your home.
- Put it in writing. It goes without saying that when you’re ready to sign on the dotted line, that you do so on an official contract that protects both parties from financial harm in the event of an incident or disagreement. Doing your due diligence (even involving legal advice) can help you achieve this.
Whether you’re planning to DIY some home improvements or hire a contractor to help with larger projects, being informed about the ways to finance these activities is an important first step in the process.