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Posted on APR 4, 2019

Why Move When You Can Improve?

Finance Your Home Renovation with a Home Equity Line of Credit

Perhaps your family has outgrown your home or you're dreaming of a spacious master suite or gleaming new kitchen. Maybe you need an in‐law suite to accommodate aging parents (or boomerang adult children). Moving is certainly one solution, but economically and socially, staying put and renovating may be a better choice. “Housing inventories are tight and the competition for homes is high in many areas,” says Al McIlwraith, Vice President, Private Banking, Johnson Financial Group.

Location, location, location

It may seem clichéd, but the old real estate adage about location is solid. “If you love your neighborhood, are situated on a great lot, have friends and family nearby or access to a good school system, you may want to stay and remodel your home to suit your current needs and tastes,” McIlwraith says.

“You already know what works and what doesn't in your home, giving you an edge in planning any renovations.”

Making the right decision

Before starting a home remodeling project, consider costs and the home's resale value once renovations are complete. For example, according to Remodeling Magazine's Cost vs. Value Report, the average cost of a major upscale kitchen remodel in the Milwaukee area is more than $130,000, with close to 53 percent of the cost eventually recouped.1

“But that's just an average. In high‐demand areas, the right renovation may yield a higher return dollar‐for‐dollar,” McIlwraith says. “Consulting with a real estate agent, contractor and banker can help ensure you're not over‐improving.

“Find a reputable contractor and have them plan, spec and price out the project,” McIlwraith says. “But don't sign the contract until you share the plans with your banker. We can order an appraisal and estimate what the house will be worth once the work is done so you can make an informed decision.”

Leverage smart financing with a HELOC

You could finance your home renovation by taking out a conventional construction loan or paying cash. But a home equity line of credit (HELOC) may make more sense. Here's why:

  1. Consider fees. Traditional construction loans may have higher fees than a HELOC. In addition, most construction loans require you to pay off the existing first mortgage and wrap it into the new loan. “With a HELOC, you may be able to finance up to 90 percent of the home's improved value,” McIlwraith says. “If you're sitting on a first mortgage below 4 percent, why pay that off and roll the entire balance into a higher‐rate variable construction loan?”
  2. You pay only for what you use. Interest payments are calculated only on the dollar amount you've drawn from the line of credit, with draws based on a contract with the builder.
  3. Potential tax advantages. Both construction loans and HELOCs may offer tax advantages when used for home improvements. Be sure to consult with your tax advisor or attorney to determine deductibility of interest in your particular situation.

    “Finally, there are downsides to using cash,” McIlwraith says. “If you liquidate an investment to pay for a renovation, you may trigger taxable capital gains. When you can get a HELOC with a rate that's still historically low with potential tax advantages, why not keep that money working for you? An investment professional can help you consider the pros and cons.”

Make your dream home come true

If you're ready to tackle a home renovation, start talking with a real estate agent and contractor (we can help you with that process). Before signing on the dotted line, contact your Johnson Financial Group advisor to explore your best options for financing.

1 Source: Remodeling “Cost vs. Value Report 2018,” © 2018 Hanley Wood, LLC.

Products offered by Johnson Bank, Member FDIC, a Johnson Financial Group company. Loans are subject to credit and property approval, bank underwriting guidelines, and may not be available in all states. Other loan programs and pricing may be available. Certain conditions, terms, and restrictions may apply based on the loan program selected. The term of the loan may vary based upon program chosen. Property insurance is required; if the collateral is determined to be in an area having special flood hazards, flood insurance will be required.