Home equity lines of credit (HELOCs) and home equity loans have been around for decades. Even so, they’ve become increasingly popular in 2023, and they’ll likely remain popular as long as home values keep rising, which they’re set to do for the foreseeable future. High interest rates, coupled with a shortage of homes, will ensure demand outweighs supply long-term even though many would-be homebuyers are waiting until rates go down to buy a new home. Home renovations are one of the main reasons people take out a HELOC or home equity loan. In some cases, the renovations are optional. In other instances, homeowners borrow against their home equity because it’s the only feasible way to obtain financing for needed home repairs. In fact, homeowners who would have chosen to sell a home in need of extensive renovations in times past now have no choice but to keep the home as trading in a low-interest rate loan for one with a high interest rate can put unsustainable pressure on any homeowner’s budget.
How are Borrowers Using Home Equity Loans and HELOCs?
A November 2023 survey found that 43% of homeowners who used home equity loans on home improvements did so in order to make cosmetic repairs. Nearly 30% took out a loan to make the home more eco-friendly. About 28% of borrowers used the money to add key features the home lacked. The kitchen and bathroom are the two most common rooms to renovate, as over half of all homeowners doing renovations target these two rooms. Only 38% of homeowners doing renovations pay attention to the living room, and even fewer pay attention to bedrooms.
Using a home equity loan to renovate the home makes life more comfortable and convenient for a homeowner. In fact, 93% of homeowners say home improvements have improved their quality of life. What’s more, borrowing money to do renovations is a wise investment that can improve a homeowner’s financial position by increasing a home’s value. Replacing an old HVAC unit with an energy-efficient model offers a 103% return on investment. It also lowers a homeowner’s utility bills. Improving the home’s curb appeal by replacing vinyl siding with manufactured stone veneer and purchasing a new entry door likewise have an ROI of over 100%. What’s more, the interest rate on a HELOC or home equity line of credit is typically lower than it would be for other loan types. Another benefit of these financing options is that homeowners can deduct the interest payments on a home equity loan or line of credit from taxes.
Another popular use for HELOCs and home equity loans is to consolidate debt. Tapping into home equity is a smart move for anyone who is struggling to pay off high-interest loans. What’s more, it’s far easier to manage a single loan than it would be to manage multiple loans with varying interest rates. However, using a HELOC or home equity loan to consolidate debt isn’t a decision that should be made lightly, as it can backfire. Defaulting on an unsecured loan can tank one’s credit rating. However, defaulting on a HELOC or home equity loan can result in the loss of the home.
Who’s Taking Out HELOCs and Home Equity Loans?
Home equity loans and lines of credit are most popular in Utah, Idaho, and Rhode Island. In these three states, there are an average of 726 home improvement loans for every 100,000 owner-occupied homes, far higher than the national average of 361 home improvement loans for every 100,000 owner-occupied homes. Hawaii comes in first place for the highest home improvement loan amount, with the average home improvement loan in the state coming to $213,373. California is in second place with an average home improvement loan amount of $193,150. Massachusetts is in third place with an average home improvement loan amount of $145,965. However, the high loan amounts don’t necessarily mean that homeowners in these states are paying the most for their loans. While Hawaii homeowners have to pay an average of $1,137 a month for their loans and California homeowners shell out an average of $1,099 per month, Louisiana homeowners pay the most for their home improvement loans, with the average monthly payment coming to $1,212.
Taking out a home improvement loan or home equity line of credit can be a great way to get ahead financially. The money can cover needed repairs or optional renovations that can boost a home’s value long-term. Alternatively, a homeowner can use the funds to pay off other debts and thus save money on loans with a high interest rate. However, while HELOCs and HE loans are a popular way to improve one’s financial standing, they’re not without their risks. Those who need financing to make needed home repairs would do well to consider all financing options in order to get the best possible deal, while those who want to do home renovations should carefully consider the costs of renovations as well as the expected return on investment in order to make sound financial decisions.
If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].