Home prices have surged over the last four years and are still rising, cooling what has been a red hot housing market. But as buying a home has become more pricey, research by TD suggests more homeowners plan to spend money to improve the houses they already have.
The survey found 48 percent of homeowners expect to renovate their homes in the next two years, with a third of those consumers budgeting more than $50,000 for the work. About half plan to pay for the renovations using existing assets, with the other half borrowing the money.
Of those borrowing the money, about half will tap into their home’s equity with a home equity line of credit (HELOC); the other half plans to use a credit card or personal loan.
"While there are many viable options for funding a renovation, a home equity line of credit is one of the most affordable ways to borrow," said Jon Giles, Head of Home Equity Lending at TD Bank.
There are several advantages to taking out a home equity line of credit. For starters, the interest rate on a HELOC is significantly lower than the interest rates charged on credit cards and personal loans. That’s because the loan is secured by the equity in the property.
While the average interest rate charged on credit cards is around 17 percent, a HELOC’s rate is often tied to the bank’s prime rate and currently hovers around 5.5 percent.
"This also provides flexibility, as most homeowners won't want to draw on cash reserves or savings when unexpected expenses arise," Giles said.
The rise in home values over the last few years has helped homeowners gain equity. Those who purchased their homes several years ago have also been paying down their mortgage, reducing the amount of money they owe.
According to TD Ameritrade, the average homeowner with a mortgage had about $113,000 in equity in their home by the end of last year. Just 36 percent of survey respondents said they’ve made use of that equity through a HELOC.
"We've found that many homeowners simply aren't aware of how they can leverage the equity in their homes," said Giles. "Home equity financing is ideal for projects that will add value to one's home, such as a renovation. It's also frequently tapped to consolidate higher interest rate debt, or to help with education expenses.”
Until the most recent tax law, the interest on a HELOC was tax deductible, making it an even better deal. However, that tax advantage went away at the end of 2017.
When it comes to actually doing the work, 64 percent of those age 18 to 34 said they would complete at least some of the renovations themselves. Sixty percent of baby boomers said they would leave all of the work to professionals.