Most homes in America are purchased with a mortgage. If you have a mortgage, you probably have some equity in your property. This is almost definitely the case in 2022 because house values are peaking at record highs. For many years, the second mortgage has been a popular financing tool for homeowners to remodel or rehabilitate their home. Many financial advisers recommend a 2nd mortgage for home remodeling for many valid reasons, so let’s reveal why.
One of the most common sources of the cash to do a home remodel is home equity. Many home owners find that a 2nd mortgage is the perfect choice for home renovations. This is because you are using part of your home’s value to enhance the value further. As many home improvements increase a home’s value, this can be a great way to improve your finances.
Many home owners find that using equity to boost the value of the home can help them to use the new equity created to pay for what was borrowed. This will only help you when you sell the home, but still, it can be a great move.
Home renovation projects are becoming more common, and about 50% of all home-equity loans are used for this purpose. It is true that doing a home renovation project with home equity makes sense, but there are some projects that will pay you better in the long run than others. There also are other factors to consider with a second mortgage.
Remodeling your home just became more realistic with newly released 2nd mortgage programs that offer quick money for house improvements and more.
Best Reasons to Get a Second Mortgage for Home Remodeling
Here are some advantages and factors to consider about getting a second mortgage for a home remodel:
1. Return on Investment Can Be High
Some home renovation projects pay you better than others when you sell. Renovating parts of the home that are used a lot tend to pay better than, say, remodeling an office.
For example, some people like to remodel the kitchen first. This project tends to pay off fairly quickly because people spend so much time in the kitchen. A newly remodeled kitchen also helps to get the home sold faster.
Another project that can result in a high return on investment is finishing the attic or basement of the home. Also, many home owners opt to remodel the master bathroom. A typical remodel will cost from $10-$20,000. The average ROI on that project will be in the area of 60%.
There is no question that investing your home equity into a high ROI improvement will help the value of your home in the long run. If you do it right, you can go through the second mortgage process several times. As the home increases in value, you can borrow more money against it to do more renovations.
2. Tax Advantages on 2nd Mortgages
There are some exceptions, but the interest that you pay on a 2nd mortgage usually may be deducted off of your income for your federal tax return. This may be able to save you thousands of dollars off of your taxes every year!
3. Second Mortgage Interest Is Low
The reason that so many people decide to get a second mortgage for a home renovation is that the interest on the loan is low. The 2nd mortgage is secured by your home, so the bank is able to give you a much lower rate than a personal loan or a credit card loan. Most home owners will never be able to borrow money at such a low interest rate. This helps to keep the payments reasonable. In most cases, the most competitively priced home-improvement loans are second mortgage liens.
4. 2nd Mortgage Offers Higher Amounts
Because you are using your equity and it is secured by the property, you usually can get a higher loan amount than on an unsecured personal loan. This allows you to do more home renovation projects. If you want to do a big kitchen remodel, you easily could need $50,000 or even more. This type of money is best acquired with a second mortgage loan.
5. 2nd Mortgage Is Long Term
A second mortgage can be paid back over many years, thus reducing your payments. A home equity loan may be paid back over 20 years or more, while a home equity line or HELOC loan will probably be paid back in 10 to 15 years. Either way, you will save money on your payments. Get help searching for the best HELOC rates online.
6. 2nd Mortgage Is Easier to Get
This will depend upon your credit score, but generally, it is easier to get a home equity loan than your first mortgage. You already own a home that you have been making regular payments on. So, the second mortgage qualification process is generally less onerous the second time around. Many home owners find that they can get their second mortgage closed in just a few weeks.
Most second-mortgage lenders are looking to approve borrowers that have demonstrated a consistent payment history but there are still a few companies that will take bigger risks on home equity loans with bad credit.
A 2nd mortgage loan is a fantastic way for you to improve your home with a remodel. You can get a lot of money at once, at a low interest rate, and pay it back over many years, so your loan payments are low. It also is quite easy to qualify for, and can really give you a great return on your investment.
Also, rates are low right now and home values are going up, so you may have more money in your property than you might think. We recommend that you speak to a mortgage lender today to see if you can get going on your home remodel with a second mortgage. You also can consider doing a cash out refinance to get your home equity. But this is only the best move for the home owner who can get a lower first mortgage rate in the current market environment. If not, a second mortgage is your best bet.
9 Reasons Why a HELOC or 2nd Mortgage is the best way for Homeowners to Finance Home Improvements and Remodeling this Year
Homeowners who have considered refinancing and pulling out cash in 2022 may want to think twice. As of April 2022, mortgages for refinances are over 5%, so many people with first mortgages issued in the last few years probably don’t want to refinance to get cash.
Instead, a HELOC or 2nd mortgage is probably the best way to finance your home improvements and remodeling in 2022.
With a HELOC or home equity line of credit, you can get tens of thousand in cash for home remodeling and leave your first mortgage intact.
Keep reading to learn more about how a HELOC could be a perfect fit for your cash needs in 2022.
Home Prices Soared in 2021
The biggest reason you should get a HELOC in 2022 to fund your home remodeling is you probably have more equity in your home than you realize.
Did you know that home values rose faster than any time in history in 2021? The median home sales prices last year was $346,000, up 17% from 2020!
For people who have a home already, there is more good news. Homeowners gained an average of $50,200 in equity in just one year. This increase is also a record. In fact, the rise in home values was even higher than in the old days before the mortgage crash of 2008.
But the increases in home values are based in reality much more than 15 years ago. Today, there are more federal regulations that require lenders to ensure people can afford their homes. There also is a serious housing shortage in the US.
In December 2021, there was a record low housing inventory and there still are not enough homes to meet the demand.
Also, people working at home during the pandemic have wanted a bigger house and wanted to buy. But record low supply and high demand increased prices and that is boosting your home equity.
Home prices will probably only rise 4-5% in 2022, but it’s still a fantastic time to take advantage of your increased equity with a HELOC.
HELOC Rates Are Still Low In 2022
It’s true that mortgage refinance rates are going up, but there is still time to get a low rate on a HELOC.
In April 2022, the average rate for a 10-year HELOC was 3.99% and the rate for a 20-year HELOC was 5.14%. If you got a 20-year HELOC for $25,000, you would only pay about $107 per month during the draw period and about $167 during the repayment period.
Keep in mind that after the introductory period, the interest rate could rise. Still, you probably cannot imagine a cheaper way to borrow money to finance your renovation costs! It’s common to pay 15% or 20% for a credit card or personal loan. So, with a HELOC, you can save hundreds of dollars per year in interest!
Potential Tax Advantages
People who use their home equity for home renovations are in for more good news in 2022! Because of federal tax law changes in 2017, homeowners can still deduct their mortgage interest off their tax bill, IF they use the money for capital improvements on their home.
What are capital improvements? It’s a renovation or remodel that adds value to the property.
For example, replacing the roof and remodeling the kitchen with new counters, floods, and cabinets are capital improvements. Your home will be worth more when the work is done.
But simple maintenance and repairs are not improvements, so the HELOC interest cannot be written off on taxes. For example, repairing a broken AC system or repairing a leaking roof are not capital improvements.
As long as you are upgrading the home with new features or square footage, you can write off your HELOC interest in 2022. There have been tax law changes, but you still may be able to deduct your mortgage interest from your taxes if the money is used to improve the home. Of course, we always suggest that you talk to your tax advisor to find out if you can still deduct your HELOC interest on your next tax return.
Caps On Interest Increases
Most lenders have caps on how much the interest rate can rise on a HELOC. While the rate can rise with the market, there will be a cap on how much it can rise in one year and over the loan’s life.
Increase The Home’s Value
We already pointed out how much equity homeowners have gained in the past year. When you do home renovations, you will add even more to your home value in 2022!
It’s unlikely that home values will continue to rise like the last one or two years, but your home improvements will make your value still go up.
One of the greatest benefits of a HELOC this year or any year is you have flexibility with the funds. This means you only need to use the money you need for a given time.
A HELOC is a line of credit, similar to a credit card. There is no interest charge until you pull out the money. For example, say you are doing a major home renovation on the kitchen and need $40,000 in several installments over three months.
You don’t need to take the full sum up front, which is what you would get with a home equity line. You would pay months of interest that you don’t need to. But with a 2nd mortgage HELOC, you only draw the money when you need it, so you can save hundreds in interest charges. Once you have the money available in your HELOC credit line, you can use it for any home renovation you like! Popular uses for equity are kitchen improvements, bathroom renovations, and energy efficiency upgrades, such as solar panels and new windows.
More Usable Home
If you are like many Americans in the COVID era, you are probably spending more time working at home and just being around home. 2022 is the perfect time to renovate your house so you can have more space and more things you enjoy.
If you have the equity, why not enjoy a low 2nd mortgage rate and improve the family room, kitchen and bathroom? Or, add more usable space outside with an outdoor kitchen and swimming pool.
No Restrictions on Second Mortgages
You don’t need to tell a lender or anyone what you use the money for. While it’s critical to be financially responsible for your own good, you can use the money for what you like in 2022.
Limited Closing Costs
A cash-out refinance offers many benefits, but it tends to come with high closing costs. With a HELOC, the closing costs are lower. Some lenders offer HELOCs with no closing costs. You may need to pay a slightly higher rate or roll the closing costs into the loan, but no out of pocket costs can be a big help!
More Reasons Why Homeowners Are Choosing Second Mortgage Loans to Pay for House Improvements and Remodeling this Year
Home equity lines of credit (HELOCs) are finally back! When mortgage rates were well below 4% for years, it made a lot of sense to do a cash-out refinance if you wanted to cash in on some of your home equity.
But in 2022, rates on 30-year mortgage have risen to nearly 6% and are trending higher. It often doesn’t make sense to redo your first mortgage to pull out cash.
Instead, you can use a HELOC to get the equity in your home and keep the first mortgage in place. A HELOC is a unique second mortgage and borrows against some of your home equity.
HELOCs were not as popular for several years as 3% and 4% interest rates were common in first mortgages. As the US government tightens the money supply to reduce inflation, mortgage interest rates are soaring. So now is the time to consider a HELOC.
One of the most popular reasons homeowners apply for a HELOC is to improve their home. You can use some of your equity to improve the home, which makes it more enjoyable to live in. It also will be worth more when you sell it.
If you are thinking about using your second mortgage loan to pay for home improvements, here are some common reasons and benefits:
Home equity is often one of the least expensive ways to borrow money for home renovations. The loan is backed by the home, which means the lender will charge you a lower interest rate. If you default, you could lose the home, so most people figure out a way to pay back the home loan.
A HELOC usually has a variable interest rate and the introductory rate may be quite low, and you probably will only pay interest during the draw period. After the draw period of five or 10 years is over, you also need to pay principle, but you may be making more money at that point, so it’s ok.
After you are approved for your loan and it funds, you are given a debit card and a checkbook so you can easily pull out money when you like. It often works best for large home renovation expenses to write a check. But you also can use the debit card to pay for materials and contractor labor, it’s up to you.
More Money Available
With home values soaring in the past few years, more Americans have more equity than ever. You may be able to get a much higher credit limit, backed by your home, than you could get for a personal loan or credit card.
Many people are able to borrow $50,000, $100,000 or even $300,000 to pay for house renovations and remodeling. And the interest rate is much lower than non-secured loans.
Getting a 2nd mortgage line of credit for home renovations could be one of the smartest things you ever do. You have access to tens of thousands of dollars of equity and you can get a competitive interest rate.
Even with rising interest rates, it’s still possible to get a 6% or 7% interest rate, which is hard to beat in a rising interest rate environment. Speak to your lender today about a HELOC and start dreaming about those home improvements you have always wanted.
Closing on 2nd Mortgage Loans
2022 is a fantastic time to get a HELOC or 2nd mortgage and finance your home improvements. Interest rates for HELOCs are still low, homeowners have plenty of equity, and fixing up your home will add to your home’s value. Also, you will probably be able to take advantage of the tax break on mortgage interest if you use the money for home improvements.
So why not speak to your mortgage lender today about a low-rate second mortgage in 2022? You’ll be happy you did.