Leveraging Your Home’s Value for Home Renovations

For many homeowners, their house is their most significant asset, and seeing its value increase over time is always encouraging. Homeowners who consider their property a key component of their retirement portfolio have likely been pleased with the significant appreciation in home values in recent years. One good illustration of this is in the Midwest, where the year-over-year price appreciation during the first quarter of 2024 was 7.4%[1].

Given the relatively high value of homes over the past few years, homeowner’s may be wondering how they can make the best use of any equity they have. It’s a good question … and there are several factors to consider.

How can I make the most of my home’s high market value?

Selling your home when the market is high might seem like a great idea, but there are other things that come into play. For instance, when you sell one home during a market peak, you’ll also pay a premium on any new home you’re looking to buy next, said Steve Dobin, Director of Home Lending Products at Old National Bank.

Getting a new mortgage is something to think about, as well. “If you own your home free and clear, or are locked in at a low mortgage rate, selling your home likely means getting locked into a higher interest rate for a new home,” Alexis Stier, Consumer Lending Manager, VP at Old National Bank, added.

With that in mind, there are other ways to tap into the equity of your home without selling it and taking on a potentially larger mortgage. For example, “the benefit of any increase in market value is that you likely have more equity to tap into for home improvements,” explains Kathleen Dembinski, Solutions Center Manager, with Old National. “You can tap into that increased equity of your current home and make intelligent improvements so that you’re not only enjoying your home right now, but also increasing the value of your home for the future at the same time.”

What is a home equity line of credit, or HELOC?

A home equity line of credit is a revolving line of credit that allows you to borrow against the existing equity you have in your home. While it’s true that a HELOC is an additional mortgage on your property — with its own interest rate to consider — when making an informed decision about whether the HELOC is worth it, you should consider the blended rate factor.

A blended rate is a combined interest rate that takes into account both your existing mortgage and the new HELOC rate. “When helping a borrower make an informed decision, I always bring in the blended rate factor,” said Dobin. “Doing so often makes the HELOC more cost-effective in the long run.”

Here’s how it works. Consider someone with a current fixed-rate mortgage at 2.25 %. They would likely wonder why it makes sense to take on an additional 8.5 % second mortgage with a HELOC, said Dobin. “Looking at the blended rate, though, that 2.25 % becomes 3.3%, if you added a $50,000 home equity line of credit. So, you’re still paying 8.5%, but the blended rate is more doable on a monthly basis and much more favorable than refinancing at a 6, maybe 6.5% rate. Especially when you look at all the fees associated with true refinance with a cash-out versus home equity. The HELOC process is definitely more favorable.”

3 pros of using a HELOC for home renovation projects

A loan is always a loan. No matter what type of product you’re considering, you’ll owe the money back to the lender, and with added interest. Having said that, not all loan products are created equal. A few pros of the HELOC when it’s applied to home renovation projects include:

• Interest rate: The interest rate on a HELOC is variable, but historically it tends to be much lower than a traditional credit card. “Doing home improvements on a credit card should always be a last option, period,” said Dembinski.
  
  
• Timing: A HELOC offers a revolving line of credit, meaning you can draw on it when you need it, rather than taking out a lump sum. “You can draw on it do to your kitchen right now, “said Dembinski. “Then if there are additional funds available you can do the bathroom afterward. The point is, you’re only drawing what you need when you need it.”
  
  
• Payment terms: Since you’re only drawing from your HELOC the amount you need at any given time, that also means you’re only paying on what you’ve drawn. “You can make principal and interest payments, but you can also make interest-only payments until the project is done, and then work towards paying the rest down,” Dembinski added. “You have options.”

When should I take out my HELOC?

Most HELOCs come with long draw periods. The draw period on HELOCs at Old National Bank is 10 years, and you can tap into the HELOC at any point during that 10-year term, said Stier.

It’s smart to begin the HELOC process as soon as you start planning your home renovations, ensuring you’re financially prepared. “The beautiful thing about the HELOC is you don’t have to use it at all. So, it’s important to come to us first, before starting your home improvements, no matter your timeline," said Stier. “We see borrowers who are halfway through their project and then realize they need more money. It’s much better to be prepared ahead of time.”

While the average turnaround time from beginning to end is about 12 days for a HELOC with Old National Bank, Dembinski recommends homeowners give them a call at least four weeks before they estimate they might need their funds. “You can even go online and apply in your pajamas if you want,” she said. “But keep in mind that this is a mortgage, and we’ll need all the documents that you used for your original mortgage, including the possibility of getting a full appraisal on your home. After all of that is in place, the process is fairly straightforward.”

As with any big decision on your home, it helps to have expert advice from someone who knows the ins and outs. Old National Bank has all the information you need to help you decide if a HELOC is right for your home renovation needs. Take the first step today and visit us online or give us a call to get started.