Smart Tips for Using a Home Equity Loan or Line of Credit
In May, 2004, InsightExpress® polled more than 800 homeowners and asked respondents to indicate their attitudes and experiences with home equity loans and lines of credit, and to compare them with other customary lending products. One of the questions consumers answered referred to their reasons for obtaining a home equity loan or line of credit. We’ve listed the top four reasons below, along with some useful - and fun - information on each one.
38.1% of respondents indicated they would use the home equity funds to renovate or remodel their home. This is an excellent reason to obtain a home equity loan or line of credit, because you’re putting the money back into your home – thereby increasing its value.
According to REMODELING Magazine’s Cost vs. Value Report*, which compares the cost-to-construct for a variety of common remodeling projects with the added value they bring at resale, the top five projects that give the most bang for the buck are:
- Minor kitchen remodel – With an average job cost of $15,273 and an average resale value of $14,195, you can expect to recoup approximately 92.9% on this project.
- Siding Replacement – With an average job cost of $6,946 and an average resale value of $6,445, you can expect to recoup approximately 92.8% on this project.
- Bathroom remodel (mid-range) – With an average job cost of $9,861 and an average resale value of $8,887, you can expect to recoup approximately 90.1% on this project.
- Deck addition – With an average job cost of $6,917 and an average resale value of $6,000, you can expect to recoup approximately 86.7% on this project.
- Bathroom addition (mid-range) – With an average job cost of $21,087 and an average resale value of $18,226, you can expect to recoup approximately 86.4% on this project.
- The above figures do not take into consideration the possibility of tax savings; the interest on a home equity loan or line of credit may be tax deductible (consult your tax advisor).
Although these numbers are a good guideline, remember, many factors go into determining how much money you may recoup on any given remodeling project. Two things you should consider:
- The cost of material and labor in your area.
- The value of your home and the home-value trends in your area. In most cases, it only makes sense to invest significant money in your home if you are bringing it up to par with other homes in the neighborhood or, in the case of a good housing market, increasing its value just slightly over the value of other homes.
"Just for Fun…" -- In ABC’s long-running hit sit-com, Home Improvement, there was a running gag regarding the Taylor’s neighbor, Wilson; his face was always concealed from about the nose down. In most episodes, Wilson was shot from behind a fence, but in later episodes, when he got out more often, camera shots, actor movements, and prop placements were carefully orchestrated so that his full face was not revealed. In fact, during all the curtain calls for the show (except the series finale curtain call, where his entire face was shown), actor Earl Hindman, who played Wilson, would bring a miniature picket fence to hold in front of his face so that it would remain hidden from view.
31.9% of respondents indicated they would use the home equity funds to pay off higher interest debt. As we showed you in last month’s newsletter, you can save a significant amount of money when you use a home equity loan or line of credit to pay off high-interest debts.
If you transfer a $15,000 balance of just one 17% credit card to a 9% home equity loan and pay it off in five years, you’ll save more than $30,000!
If you find yourself struggling each month to make payments on high-interest credit cards or other unsecured debt, a home equity loan or line of credit might be the way to get your finances under control. By consolidating your bills into one, lower-interest monthly payment, you can buy yourself some breathing room and time to catch up. In addition, the interest on the line or loan may be tax deductible. (Consult your tax advisor).
Note: when you use the equity in your home to consolidate debt, be careful… Don’t run those credit cards back up, or incur more unsecured debt, or you might find yourself in a worse position than when you started, making payments on high-interest debts – in addition to the new home equity loan payment each month.
"Just for Fun…" According to Guinessworldrecords.com, Walter Cavanagh (b 1943), of Santa Clara, CA, USA, has the largest collection of credit cards. He has 1,397 personal, valid credit cards, with a total credit worth of $1.65 million dollars! And to hold all those cards, he also has the world’s largest wallet -- custom-made, it will hold 800 credit cards in a plastic sleeve that would stretch thirty stories high!
4.6% of respondents indicated they would use the funds they obtained from their home equity loan or line of credit to purchase a second or vacation home.
Another great use for your home’s equity is the purchase of a second home or dream vacation get-away home. Consider using the equity you’ve built up in your primary residence to make the down payment on your second home. And if you have enough equity, before you run out and get another mortgage, check out the cost of financing the second home with your primary home’s equity. Compare costs on both options – a new mortgage, vs. a home equity loan or line of credit. And don’t forget, the interest may be tax deductible. (Consult your tax advisor).
Purchasing a second or vacation home can be a sound financial move. Consider the benefits:
* Personal Pleasure – A vacation home provides a place to get away from life’s pressures and stress. What could be better than spending quality time with family and friends, in a beautiful vacation retreat?
* Investment – Whether you’re buying a second home in the same town, or a vacation home half-way across the country, you’re almost certain to reap financial rewards. A vacation home is likely to increase in value, especially if you purchase one now, in a popular area. And if you’re buying a home to use as a rental, the added income can help offset your mortgage payments now, and provide additional funds in years to come.
In any case, there may also be added tax advantages associated with buying a second home/vacation get-away. Consult your tax advisor for details.
"Just for Fun…" – The most expensive single-family home sale – and the most expensive home sale in America to date – was recently negotiated at just under $70 million, according to The Wall Street Journal. Owned by Revlon chairman and Citigroup Inc. investor, Ron Perelman and his wife, actress Ellen Barkin, the home is an oceanfront estate in Palm Beach (FL) located on “Billionaires Row.” Other “Row” residents include Donald Trump, Rod Stewart, and Netscape founder Jim Clark.
The 20,000 square foot Mediterranean-style home has 2 swimming pools, 10 bedrooms, 14 bathrooms, and 400 feet of private beachfront property. The home was designed by Abram Garfield, son of President James A. Garfield, and built in 1919.
Perelman paid $11.6 million for the house in 1994. The new buyer has asked to remain anonymous. Before this sale, a few luxury properties in the United States had sold for as much as $45 million.
4.3% of respondents indicated they would use the funds they obtained from their home equity loan or line of credit to purchase an automobile.
With today’s low home loan rates and the potential of a possible tax advantage (consult your tax advisor), using your home’s equity to purchase a new or used vehicle might be a sound financial move. You should compare all your options – talk to your bank and the car dealer – and weigh the pros and cons of each means of financing.
Having a home equity line of credit available before you go car shopping may make the process simpler. A HELOC provides you with a flexible source of financing, allowing you to purchase a vehicle immediately, with possibly better terms.
"Just for Fun…" – Everyone is familiar with Henry Ford, but many people are not familiar with Alexander Winton. The Winton Motor Carriage Company was a pioneer US automobile maker. Winton was the first American company to sell a motor car, and their first cars – called "horseless carriages" – were hand-built, piece by piece. They weighed in at 1,000 pounds, had painted sides, padded seats, a leather roof and gas lamps – and The Goodrich Rubber Company provided the tires.
The first person to ever buy an American-built car was Robert Allison of Port Carbon, PA. He bought a Winton on March 24, 1898. By 1899, Winton had sold more than a hundred vehicles, making the company the largest maker of gas-powered automobiles in the US. That same year, H.W. Koler opened the nation’s first automobile dealership in Reading, PA. The Winton Company built the first auto hauler in America in order to deliver their vehicles to Mr. Koler’s dealership.
Winton was the first to use a steering wheel instead of a tiller. He also put the engine in front of the driver, rather than under the car, and he developed the first practical storage battery. But he is probably best known for the effect he had on others. James W. Packard, a maker of electrical products, visited Winton to offer a few suggestions for improving Winton’s vehicles. Winton lost his temper and said: “If you don’t like the car, why don’t you build your own?” Packard, of course, went on to start the Packard Motor Car Company.
Although competition grew fierce, Winton continued successfully through the 1910s, marketing automobiles to upscale consumers.
* Source: REMODELING Magazine
Publication date: 2004-11-01
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