Should You Use a Home Equity Loan for Home Improvements?
The economy has made most homeowners rethink the idea of upgrading to a bigger, better, or more suitably located property. Although the market is great for first-time buyers, what with foreclosures and short sales driving down prices, the threat of job loss makes it dicey for even qualified buyers to look at new homes. And for those that are selling a house in order to upgrade the prospects are even worse since they will first have to sell their current home (likely at a loss). As a result, many have decided to stay put and ride out the recession before considering making a change to their living situation. Of course, this means that homeowners will have to deal with the house they have, which could mean living with sagging cabinets, buckling floorboards, leaky faucets, and the like for the foreseeable future – not a terribly appealing prospect. It is for this reason that many homeowners are now considering the possibility of making improvements in the meantime.
There are several benefits to doing home improvements in a recession. For one thing, contractors and laborers looking to stay afloat may offer spectacular savings over what their services cost just a few short years ago. And you can find amazing deals on materials, as well. Further, doing upgrades now only stands to increase the value of your home when the market improves and you’re once again able to sell at a profit. Unfortunately, you still have to come up with the money to do your renovations in the here and now. For most this means dipping into savings, or more likely, securing a home equity loan against the value of their property. The only question is: should you take out such a loan?
The criteria for answering this question are complex. First, you must consider whether or not upgrades are necessary.
If your foundation has cracked or there’s a leak in the roof, for example, fixing the situation could be critical to avoiding larger expenditures down the line. You should take out a home improvement loan in the interests of preserving the value of your property, if not increasing it (although a new roof definitely stands to boost your property value). But if you’re making cosmetic changes, you might not want to add to your burden of debt just yet. And before you move ahead you should also think about what you’ll get out of your upgrades. Overhauling an ancient or ill- functioning kitchen or master bath could show a significant percentage of return on investment when you sell. But replacing flooring will likely result in little to no payback.
Of course, you also need to address whether or not you can afford the additional payments. Just because you receive approval doesn’t necessarily mean you can spare the cash. With all the deals right now on materials and labor it can be tempting to move ahead with home improvements, especially if you’ve had to temporarily discard the idea of moving to a new house. But this link our society seems to have between making purchases and feeling good can get you into trouble. Take a long, hard look at your finances to make sure you can afford the additional monthly expense that a home equity line will entail before you sign on the dotted line. Remember that your house is the collateral, so if you fail to pay you could lose your newly upgraded home for your hubris.