If you’re a current homeowner looking to upgrade in one way or another, what’s more cost-effective? Should you put your home on the market in order to purchase a new and improved one, or stick with your current abode and take out a Home Equity Line of Credit (HELOC) to fund upgrades?
The answer to that question is the premise of HGTV’s hit reality show Love It or List It (created by Maria A. C. Fogarty, Big Coat Productions, 2008-present). The show follows eager homeowners as they consult with both a realtor and an interior designer to determine what makes more sense: to “list” their current home, or fall in “love” with it (plus a few upgrades) all over again.
Many families, after spending countless hours hunkered down at home this past year in spaces transformed into multi-functional offices/schools/gyms, are ready to move on. Perhaps you’ve outgrown your home, or you’re simply ready for a fresh start. The reality is that not everyone is in a position to sell and upscale—but investing in home improvements isn’t a bad alternative. So what should you do? Love it, list it, scale up, or settle down?
The answer likely depends on several factors, including your location, income, family size, and the equity of your current home. If you’re not sure whether to put your home on the market or invest in version 2.0, consider the drawbacks and benefits of each path to improvement.
Location: If selling your home will mean switching neighborhoods or cities, consider the value-add of your new location before you list. If you’re thinking of moving to an area that comes with improved everything—schools, community organizations, proximity to shopping—then upgrading to a new home is also an investment in your quality of life—and that’s hard to put a price tag on.
Move-in ready: Maybe you want an extra room for a home office, or you’ve come to appreciate time spent at home and want amenities like an entertainment center or a large backyard. These are all major improvements, and if your current house lacks good bones, can’t withstand the type of renovations you desire, or is valued at less than the cost of renovations, it’s time to call the realtor.
Seller’s market: With low inventory throughout much of the country, sellers are poised for success. Motivated homeowners are ready to sell fast—and that means there’s less wait time for new buyers searching for a place to hang their hat. Before listing, find out the average length of time houses tend to stay on the market. This number varies based on location, time of year, and housing price.
Consequences of COVID-19: With the ongoing exodus from cities to smaller communities around the country, your home might be in incredibly high demand. In certain locations, it may even be poised to fly off the market or spark a bidding war. Track recent sales in your area and see how your home compares.
Low interest rates: Yes, buying a new home means incurring realtor’s fees and moving costs. But making the leap now may help you save big over the long run. With mortgage rates at historic lows, locking in a low rate now will save homebuyers thousands of dollars in interest over the life of the loan.
At First American Bank, an experienced loan officer will walk you through the mortgage application process step-by-step. While the traditional fixed rate mortgage makes sense for many families, First American Bank also offers loans with shorter terms and lower initial interest rates, depending on your budget and credit history. Our advisors are available to help you understand your options and help you make the best choice. We’re also here to help you navigate the period between selling your old home and buying a new one—and bridge the gap with a loan if needed.
LOVE IT
With so much change and upheaval, you might crave the consistency of your current home plus a few bells and whistles. If you plan to stay in your home, a Home Equity Line of Credit, or a HELOC, can help you tackle one of life’s biggest expenses. A HELOC allows you to leverage your current home equity and strengthen it at the same time. The amount of your HELOC is determined by the equity of your home, which is calculated by the difference between your home’s market value and how much is owed on your mortgage. There’s also a built-in cushion of about 20%, meaning you’ll never borrow up to the total market value of your home.
Here’s why making your current house your forever home by opening a HELOC might be right for you:
Financial freedom: Homeowners can use loan proceeds up to their total limit as needed during the draw period, which is typically 10 years. That means you can apply your HELOC to minor renovations or a complete remodel over the course of a decade. But should non-home related expenses like your child’s education or a major life event arise, you can use your HELOC to cover those too.
Borrowing power: A HELOC is similar to a credit card in the sense that once the line of credit is paid, the customer can borrow more funds. For example, if you take out a $50,000 HELOC and then pay $25,000 back toward the principal, you’ll have $25,000 in available credit. This allows you to do renovations over time, whether that means making room for another baby or adding energy-efficient upgrades that will save you money down the line.
Variable interest rates: With a HELOC, the interest rate is variable and your interest-only payments are based on the outstanding balance on the account. That means if you’re taking money out slowly and paying off the balance quickly, you can save in interest over the life of the loan.
Flexibility: A HELOC can be used to upgrade your home in myriad ways, but it’s wise to consider exactly what you want to do before applying. Ask yourself which repairs will most improve the quality of our home life—and increase the value of your home should you eventually decide to sell. Will you tackle repairs yourself, or need to hire a contractor? If the construction is extensive, will you be able to reside in the house during renovations or need to find temporary lodging? And whether you choose to tackle some repairs now or spread them out over time, your HELOC will be available to you over the entire draw period. Before opening a HELOC, make sure you know that it can provide you what you need.
In some ways, whether you list your home or stick with it, you can’t go wrong. Mortgage and HELOC rates are both historically low, and from day one, First American Bank will start an ongoing conversation about the amount you can get if you stay—or go. It might take time to figure it out, but one of our advisors will be there every step of the way.
If the past year has taught us anything, it’s that life is unpredictable. First American Bank can provide you with the guidance and expertise you need to make the best choices for your family. Your home is your sanctuary, and our reputation is built on helping customers make informed choices rooted in their values and long-term goals. Whether you dream of skylights or a sunken tub, moving to a new neighborhood or staying in your old one, at First American Bank, we can help you achieve your goal.
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