A: For many years, borrowing against the equity in your home was a go-to move to finance home improvement projects. The reason? Home prices were rising quickly and, as a result, equity for homeowners was building fast. That changed after home prices began a decline in 2006.1


With home prices rising again in some areas of the country, many people are reconsidering this option. But, keep in mind, real estate is generally a long-term investment. In particular, building equity in your home is often hard-earned over long periods of time as you pay down the principal on your mortgage, which can be slow- going if the lion’s share of your monthly payment is interest on the assumed debt. Also, don’t forget, the equity you hold in your home can decline if the value of your home decreases. You run the risk of a double negative: a little bite out of home equity can turn into a lot to swallow should you need or want to move suddenly. In other words, your new family room could be funded with a home equity loan that results in owing more than your home is worth or having to sell with little to no gain. It’ll be hard to relax in that room!


Having said that, if you still feel your home is an appreciating asset and you have substantial equity, home equity loans or lines of credit can be a substantial source of funds and remain a popular option. Here are the most common uses of home equity loans:


  1. Debt consolidation (44%)
  2. Home improvement (25%)
  3. Automobile (7%) 2


If you do borrow against equity for home improvements, keep two key things in mind: make changes that pay off and don’t over-improve your home. The return on investment you get from remodeling varies widely when it comes to boosting the resale value of your home. Generally, minor kitchen remodels will yield the best bang for your buck. Even then, you should expect to get only about 93% of your investment back. The numbers are often lower for other changes.


Having said all this, if you are staying in your home and really need or want to make some adjustments (adding a downstairs bathroom for someone who can’t use the stairs, etc.), home equity loans are a viable option. There are also sometimes tax credits for certain energy efficient adjustments. If you’re having a major event like a wedding at your home, you may even be able to rationalize spending the amount you would have spent on a venue on home repairs instead in preparation for the big event.


Do any of you have experience with borrowing against the equity of your home for home improvements?


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1 Source: Federal Housing Finance Agency (www.fhfa.gov) A Brief Examination of Previous House Price Declines, June 2009

2 Source: www.BBT.com: Common Home Equity Uses. Chart.