Move or remodel? Why your home equity may hold the key.

Whether you need another room for a home office or you’re tired of cooking in a cramped kitchen, there are plenty of reasons to look for a change in real estate. But you don’t always have to move to get what you’re looking for. 

In many cases, remodeling can help you get the home you want, without having to make a change as big as moving. And if you’re worried about affording home improvements, consider using your home equity. Depending on how much equity you’ve built up, you might be able to put more money into construction than you thought, which could tip the balance in favor of remodeling.

Still, deciding whether to sell or renovate isn’t an easy choice. Here, we’ll walk you through what to consider.

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Should I move or remodel my home?

Deciding whether to move or remodel your home depends on many factors. First, consider what you’re trying to accomplish. Do you want a larger home? A modern kitchen? A quieter neighborhood?

Also think about what’s feasible. Would you be able to get permits to build an addition to your home, or are there restrictions you need to keep in mind?

Some goals can only be accomplished via moving. In other cases, like when housing inventory is low, you might be better off remodeling.

Also consider what the processes would be like. Both can be uncomfortable at times.

Moving comes with a lot of baggage, no pun intended. You have to navigate the home buying and selling processes, along with the actual act of getting everything out of one home and into another.

Renovating isn’t always a dream either. You might have contractors in your home for weeks at a time, and the areas that you’re renovating could be unusable.

So, think about which option you would prefer, while also keeping the end results in mind.

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Will I be better off if I sell my home?

When figuring out whether to sell or renovate, cost plays a major role too. ‍

An analysis by StreetEasy and Sweeten finds that moving in New York City costs about $18,000 less on average than a full apartment renovation, but that only accounts for things like real estate transaction fees and taxes. You also have to keep in mind what the purchase price of your new home would be and how that compares to any added value from renovations.

The same analysis finds that a kitchen renovation, for example, is much less expensive than moving. So if you’re only looking to change part of your home and you’re comfortable with other aspects, like your neighborhood, then it can make much more sense to renovate.

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What is home equity?

Home equity is the portion of a property that you own, aside from what you owe. In other words, home equity equals your home’s value minus property debt. So, if you have a home worth $1 million and a mortgage of $500,000, then you have $500,000 in home equity.

Home equity can be the amount that you put into your home as a down payment, the principal that you’ve paid back on your mortgage, and any appreciation in your home’s value. So, with rising house prices, you may have more home equity than you realize.

If you don’t want to take out a home improvement loan like a construction loan, which can have short loan durations and high interest rates, then accessing your home equity could help you find funds for remodeling.

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How much home equity do I need to remodel my home?

The amount of home equity you need to remodel your home depends largely on what you’re trying to change. If you want to renovate a bathroom, that’s generally going to be way less than building an addition to your house that adds several extra rooms. Plus, construction costs can vary based on location.

That said, the average U.S. home renovation and remodel project costs $47,837, according to HomeAdvisor. And most projects end up costing somewhere between $17,917 and $78,066.

Another way to look at it is that the average home addition costs $128 per square foot, according to HomeGuide. At that rate, “a 10x20 bedroom addition costs $25,600 on average, while a 20x20 family room ranges from $51,200,” the site notes.

That means there’s a good chance you can finance home improvements with your home equity, as the costs generally aren’t exorbitant.

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Best ways to access home equity to remodel your home

If you want to use your home equity to pay for remodeling, you can choose from several options, as discussed below. But keep in mind that there are risks to taking on more debt. You wouldn’t want to lose your home if you can’t pay back what you borrow from your home equity.

Also, when you remodel, you could see changes like higher property taxes, depending on your location. So, you want to be sure you can comfortably repay your loan while handling all your other financial obligations.

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Fraction Mortgage

You can unlock up to $1.5 million to pay for home improvements with a Fraction Mortgage. This type of loan lets you borrow up to 40% of your home equity, but it differs from a traditional home equity loan or home equity line of credit (HELOC).

In particular, a Fraction Mortgage is a first-lien open line of credit, meaning you’d need to use the funds to pay off an existing mortgage. But this option stands out for letting you receive a lump sum payout, with no required monthly payments.* ‍

You have the flexibility to pay back the loan at your own pace, either throughout the loan term or at the end of the five-year loan period. At that point, you might try to sell your home and cash in on the remodel, using some of the proceeds to pay back the loan. Or you might explore your options for renewing the Fraction Mortgage.

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HELOCs

Some homeowners turn to HELOCs for remodeling funds. A HELOC can act as a second mortgage. You can typically borrow around 80% of your home equity (though sometimes more) and draw from the credit line as needed. Perhaps you’d draw from the HELOC one month to pay for a contractor and later draw more for a decorator to help you furnish the redesigned space.

Yet the repayment terms might not be as flexible as a Fraction Mortgage. Initially, you might have to make monthly interest payments. But then the loan repayment can vary significantly.

“Terms vary from loan to loan. It’s very important to understand how your HELOC works before you agree. Some loans might require immediate payment of all money owed at the end of the draw period. Others may extend repayment over decades,” notes Debt.org.

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Home equity loans

Home equity loans can also be used for home improvement costs. These loans can act as second mortgages.‍

Borrowing limits are often similar to HELOCs, but the major difference is that you get the funds as a lump sum, rather than as a line of credit. That also generally means you have a repayment period that includes regularly paying back the principal and interest, like a traditional mortgage.

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Cash-Out Refinance

While home equity loans and HELOCs act as second mortgages, another option is to replace your first mortgage via a cash-out refinance. That means taking out a new loan that also frees up cash for you by tapping into your home equity. Then you would regularly repay the new loan like a traditional mortgage.

The amount of cash you can get for home improvements depends on how much equity you have, as well as factors like which lender you use. But in general, you can take out similar amounts to what you could get with a home equity loan or HELOC.

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Reverse Mortgage

For homeowners ages 62 and up (along with a few other eligibility requirements), a reverse mortgage is another option for accessing home equity to pay for remodeling. Perhaps you want to renovate your home to make modifications that help you age in place. And with a reverse mortgage, you can tap into your home equity without having to make monthly payments. Instead, the loan is paid back after you no longer live in that home.

The maximum you can borrow from a government-sponsored reverse mortgage, also known as a home equity conversion mortgage, is $970,800 as of 2022, according to the U.S. Department of Housing and Urban Development (HUD).

But you want to be careful. Many scams related to reverse mortgages exist.

“Beware of contractors who approach you about getting a reverse mortgage loan to pay for repairs to your homes. It may be a scam. Don’t let yourself be pressured into getting a reverse mortgage loan,” notes the Consumer Financial Protection Bureau (CFPB).

You also wouldn’t want to end up losing your home, like if you have to move into an assisted living facility, triggering a need to wrap up the reverse mortgage by selling your home.

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What loan has the lowest monthly payments?

The loan with the lowest monthly payments also depends on factors like the lender and your personal finances. But technically, loans that do not require any monthly payments*, like the Fraction Mortgage, have the lowest amounts.

Still, remember that a lower monthly payment doesn’t leave you off the hook for repaying the loan. You might be able to spread the loan term out and pay back the funds for your remodeling project at your own pace, but eventually, you’ll have to repay the loan if you want to keep your home. 

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What loan gets you the most money?

A home equity loan or HELOC typically gets you the most money. That’s because you can often borrow up to 80% of the equity in your home. Plus, these loans act as second mortgages, so you don’t have to pay off your existing mortgage with the loan. Cash-out refinances can also offer similar amounts but act as a first mortgage.

Some lenders go even higher, letting you take on a 90% loan-to-value (LTV) ratio. So if you had $1 million in home equity, you might be able to borrow $900,000. In select cases, you can borrow the full value of your home’s equity or even go above 100%.

However, much depends on factors like the lender you use and your personal finance situation. In many cases, though, you don’t need to borrow that much for home improvements. Nor would you necessarily want to take on that much risk and have so much debt just to remodel. 

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What loan gets you funds faster?

It’s hard to say what type of loan gets you funds faster, because so much depends on the lender and your own circumstances. In general, if you don’t need an appraisal, that would speed things up. But it could also limit your home equity potential. 

If everything goes smoothly, you might be able to get funds from a home equity loan, HELOC or cash-out refinance within a week or less, though it often takes a few weeks.

Keep in mind, however, that this generally isn’t a decision you want to rush. Take time to consider the risks and review your options to make the best financial decision you can. A fast lender might not have the best interest rates, for example, or maybe their repayment terms don’t align with what you’re looking for.

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Finance your home remodel with Fraction

Looking to fund the remodel of your dreams? The Fraction Mortgage may be the right solution for you. Get up to $1.5 million with no hidden fees, no exit penalties, and no monthly payments required.*

‍Get your free estimate today. 

‍Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.