Home equity is the difference between how much you still owe on your home loan and how much your home is worth. As a homeowner, you build equity in your home as you make payments and as your home increases in value. Equity is also a powerful financial tool. If your Hawaiian home is worth quite a bit more than what you currently owe, then you can tap into that equity to remodel and make renovations. This can increase the value of your home even more. Let’s take a closer look at how to best use that equity for remodeling as well as the pros and cons.
Advantages of using equity to fund renovations
One of the most common reasons that homeowners tap into their equity is to fund a large home remodeling project. Not only will you enjoy the upgrades in your home, but those upgrades will also add to your home’s value. Other advantages to using your home equity for renovations include:
- Tax deductions – Any interest you accrue on a home equity loan can be tax deductible if you use the money to substantially improve your home.
- Low interest rates – Home equity loans typically have lower interest rates than credit cards and personal loans.
- Interest rates are fixed – When you take out a home equity loan, you’ll get a lump sum of money at a fixed rate. This is key right now as interest rates have been rising steadily for the past few months in an attempt to tamp down inflation.
Disadvantages of using equity to fund renovations
While there are certainly many advantages to using your home equity to make renovations, there are some disadvantages as well. These can include:
- Limits on tax deductions – The interest you can deduct on your taxes is limited to up to $750,000 for joint filers and $375,000 for single filers.
- Home values plunging – Home prices have skyrocketed over the last couple of years because of the pandemic. If housing prices drop substantially, then your improvements may not increase the value of your home.
- Losing your home – If you’re unable to make payments on your home equity loan, then you could be in danger of losing your home.
Best ways to use equity responsibly for renovations
If you’ve determined that using your home equity to fund your renovations is the right move for you, then you should use it responsibly. Your home equity is an excellent way to pay for large, one-time expenses such as replacing the roof of your home. It can also be good for other home renovations, but you should carefully consider which upgrades will provide the biggest return on your investment down the line when it comes time to sell. Be careful not to overspend. Remember – you don’t need to take out the full amount you’ve been offered. Stick to what you’ll need just to make the renovations. And finally, don’t forget to deduct the interest from your taxes as this can save you thousands of dollars or more over the life of the loan.
Contact Keller Williams Honolulu today!
If you dream of becoming a homeowner on Oahu, then browse our listings and contact Keller Williams Honolulu at 808-596-2888 or [email protected]. Our team of real estate professionals has the experience and market knowledge to help you achieve all of your Hawaii real estate goals. Contact us today!
