Cashology by FNBO

Dreaming of a Home Improvement Project

Episode Summary

Home improvement projects – they can add real value to your home. But more than that they can help you fall in love with your home all over again. Remodeling the kitchen or adding a bathroom are some common home improvement dreams. Things like energy efficient windows or insulation sound boring but can add a lot of value, too. The question is how do you pay for them? That’s what we’re going to talk about today.

Episode Notes

TALKING POINTS

• Some home improvement projects return the investment better than others, right?
• That’s right.
• The ones you can really count on are remodeling a kitchen or adding a bathroom, like we just said.
• But others that help you get your money back at time of sale – reinventing a room, such as finishing a basement, adding energy efficient windows or insulation, adding a deck, and just keeping the basics in order. 
• Money is almost always well spent on these projects.

Are there others that don’t make the same return on investment?

• Oh, sure.
• Homeowners can really value and enjoy these things, but they don’t show the same return on investment.
• Things like swimming pools and whirlpool baths.
• I’d add sunrooms and expensive landscaping to this list, too.
• These things bring a lot of enjoyment so I wouldn’t shy away from them if that’s what you want.
• Just realize that not everyone values them as much as you might.

What if you want to make these improvements but feel you don’t have the savings to cover it? What are some of the options homeowners have?

• Well I want to talk about home equity loans and home equity lines of credit.
• Those are the two options that most homeowners have.
• Both let the homeowner borrow against the equity they have in their home.
• And equity is the difference between how much principal you still owe on your home loan and the current value of your home.
• So let’s say the current value of your home is $250,000.
• And you owe $150,000 in principal (not counting interest) on your loan.
• That gives you $100,000 in equity in your home.

And you can borrow against that equity to pay for your home improvement project?

• You can borrow against it to pay for anything, really, it doesn’t have to be a home improvement project.
• But the advantage of using it for a home improvement project is that the interest is then tax deductible.
• Which is nice.
• So if you’ve got $100,000 in home equity you may be able to borrow up to $80,000 or $90,000 in a home equity loan or line of credit.

And the difference between the loan and line of credit?

• With the loan, you’re borrowing a fixed sum at a fixed interest rate and on a fixed payment schedule.
• So it’s more of a one-time loan which you pay back on a schedule.
• With the line of credit, you’re setting up a revolving account that gives you access to a specified loan amount, home equity that you can call on anytime.
• And you can access that account whenever you need it by writing checks.
• You get monthly statements showing what you’ve borrowed and you make payments against what you’ve borrowed.
• A lot of people prefer the line of credit, because it revolves and they don’t have to go back to the bank every time they have a home improvement project or other need.

And the interest is tax deductible with either the loan or line of credit?

• Under the current tax law, it’s only deductible if you’re using the money to buy, build or improve a home. 
• It’s not tax deductible for anything else.
• But of course I’d encourage everyone to consult their tax advisor on tax questions and issues.

Any other thoughts for homeowners dreaming of a home improvement?

• You know, talking with your mortgage lender or tax advisor can help you decide what’s best for you
• We have these types of conversations every day.
• You don’t have to have your mind made up before you call us. 
• Just give us a call. We’ll be happy to hear from you.

Useful info/links

1. Money Crashers: https://www.moneycrashers.com/7-home-improvements-to-increase-its-value/
2. Investopedia: https://www.investopedia.com/mortgage/heloc/home-equity-vs-heloc/
3. FNBO: https://www.fnbo.com/insights/mortgage/dreaming-of-home-improvement/index.html