Financial planning is figuring out how to manage your money to reach your goals. It involves looking at your current financial situation, deciding what you want to achieve in the future, and making a plan to get there. This can include budgeting, saving for retirement, paying off debt, and investing in your home.
Your Home Could Be Your Biggest Asset
When most people consider financial planning, they picture savings accounts, stocks, or retirement funds. But there’s one big asset that often gets overlooked: your home. If you own a home, you’ve got something incredibly valuable that can play a huge role in your financial future.
Your home is likely the largest purchase you’ll ever make, and it can be a powerful financial tool. Many homeowners don’t realize that their house is not just a place to live; it’s also a significant asset that can appreciate over time.
While saving money is important, securing your future goes beyond just saving. A sound financial strategy includes understanding your assets, such as your home, and figuring out how they fit into your long-term goals. This way, you’re not just saving for a rainy day—you’re setting yourself up for long-term security.
What Is Home Equity, And Why You Should Care About It
Home equity is the difference between your home’s worth and your mortgage debt. It is basically the portion of your home that you actually own minus what you still owe on your mortgage.
In other words, your equity is the value of your investment in your home. Over time, as you pay down your mortgage and as your home’s value increases, your equity grows.
So, why should you care about home equity? Because you can tap into that equity and use it for all sorts of things, including funding home improvements, helping with your kids’ education, or even investing in something new.
In fact, for many Americans, home equity represents a large portion of their overall wealth. In 2021, the median homeowner had about $174,000 in equity, which shows just how valuable your home can be. The key is knowing how to use it wisely to secure your future.
There’s More to Home Equity Than Refinancing
Traditionally, if you want to access the equity in your home, you’d look at options like refinancing or taking out a home equity loan. But those routes can sometimes be costly, and they might not always be the best fit, especially if you’ve got a low interest rate on your current mortgage or if you don’t want to reset your loan term.
See how home equity loan compares to cash-out refinancing.
This is where it pays to think outside the box, especially when developing a smart financial planning strategy. With innovative options like RenoFi loans, you can tap into your future home equity—meaning the value your home will have after renovations—without the downsides of traditional refinancing.
Apart from being a smarter choice, leveraging the After Renovation Value (ARV) of your home is a more flexible way to make the most of your home’s potential and secure your financial future.
How to Invest in Your Home
Your investment doesn’t stop at just buying a home. Homeownership is more than the initial purchase; it involves making ongoing improvements that boost your property’s value and make it a better place to live.
Here’s how you can make the most of your investment:
- Identify High-Impact Projects: Start by focusing on renovations that offer the best return on investment (ROI). For example, adding extra living spaces, such as an Accessory Dwelling Unit (ADU), can add the most value.
- Consider Creative Financing Options: Instead of dipping into your savings or getting a traditional loan, look into options that let you borrow against your home’s future value. This way, you can get more cash for your renovation projects without having to refinance your current mortgage.
- Plan for the Long-Term: Think beyond just the immediate benefits of your renovation. Consider how the improvements will boost your home’s value over time and how that added equity could benefit you down the road.
- Work with Professionals: It’s super important to get quality work done; it will pay off in the long run. Find reliable contractors and designers who can help make your vision a reality. They can help make sure your project stays on budget and adds real value to your home.
Benefits of Investing in Your Home
Investing in your home comes with several important benefits that can lead to long-term financial rewards. Here are some benefits to keep in mind:
Increased Home Value
One of the biggest perks of investing in your home is the potential to increase its market value. Smart renovations can significantly boost your home’s worth. This can give you more equity and a better return if you decide to sell.
Greater Financial Flexibility
When you build up your home’s equity, you create a valuable financial resource that you can use later. The added equity opens up more options to tackle future opportunities, such as paying off debt or funding other investments.
Improved Quality of Life
Beyond the financial benefits, investing in your home can make a big difference in how you live day-to-day. Upgraded spaces can mean more comfort, better functionality, and a home that truly meets your needs.
Long-Term Security
Investing in your home is really an investment in your future. When your home’s value goes up, it adds to your overall financial security. This means you can feel more at ease knowing that your assets are working for you.
Tips for Funding Your Home Makeover
Now that we’ve looked at why investing in your home can be a smart financial planning strategy, here are a few tips to keep in mind when you’re ready to take out a home loan for renovations.
Assess Your Needs and Estimate Project Costs
Start by determining the scope of your renovation project. Are you planning small updates or a big overhaul? Once you have a clear picture, create a budget that includes materials, labor, and any extra expenses. This will help you understand how much money you’ll need to borrow.
Check Your Credit Score
Your credit score is important when it comes to landing a good interest rate. It allows lenders to see how you’ve managed credit in the past.
To boost your chances, take a look at your credit report and see if there are any areas you can improve. This could mean you pay down balances, make sure you pay bills on time, or even dispute any errors you find.
The better your score, the more likely you are to snag a lower interest rate, which can save you a lot of money in the long run.
Compare Lenders
Don’t settle for the first offer you find when looking for a renovation loan. Take some time to shop around and compare different lenders. Look at their interest rates, loan terms, and any fees they might charge. Some lenders may have better deals than others, so it’s worth doing your homework.
Consider Future Value
Not all upgrades really boost your home’s value; some are simply cosmetic and may not pay off in the long run. To make the most of your investment, focus on projects that truly enhance your property’s market worth.
Consider upgrades like a kitchen remodel, bathroom updates, or adding energy-efficient features—these are the kinds of improvements that catch buyers’ eyes and can really up your home’s appeal.
Be Realistic About Repayment
Financial planning means being realistic about your goals, so it’s super important to make sure that your monthly payments fit comfortably within your budget. Take a good look at your finances and figure out what you can actually afford without stretching yourself too thin.
Also, factor in how the loan will impact your overall financial situation—will it make it harder to cover other bills or save for future goals? Remember, finding a balance that keeps your finances healthy is a big part of securing your future.
Explore Loan Options
Get to know the different types of renovation loans out there. Here are some popular options:
- Home Equity Loans: These let you borrow against your home’s equity for a lump sum, usually at a fixed interest rate.
- HELOCs: A Home Equity Line of Credit (HELOC) is a flexible loan option that lets you withdraw funds when you need it, up to your limit. It usually comes with variable interest rates. Learn more about HELOCS.
- FHA 203(k) Loans: These government-backed loans help you finance both the purchase and renovation of a home. They’re a good choice if you’re looking to buy a fixer-upper.
- RenoFi Loans: Unique to RenoFi, these loans allow you to borrow based on your home’s future value after renovations. With this option, you can have access to more funds for your projects compared to traditional home equity loans.
Benefits of RenoFi
Home equity loans and HELOCs are popular choices for homeowners looking to fund renovations. But just because these options have been around for a while doesn’t mean they’re your only choices. RenoFi offers a much better alternative that lets you invest in your home for a great return without the stress of hefty monthly payments.
While a traditional 90% LTV HELOC might seem like a good way to fund a home renovation, it often falls short because the equity you have in your home isn’t enough to cover everything you want to do. One way to fix this is by factoring in your home’s After Renovation Value to boost the available equity – this is exactly what RenoFi loans do.
For instance, let’s say your home is currently worth $500,000, and you still owe $400,000 on your mortgage. You’re planning some renovations and think your home’s value will jump to around $640,000 afterward. Right now, your loan-to-value ratio (LTV) is 80%, which means you basically can’t borrow anything for your renovation. However, with a RenoFi loan, you could go up to 150% LTV or 90% LTV using that after-renovation value.
In this example, a regular home equity loan would leave you with $0 in borrowing power, but a RenoFi loan could let you borrow up to $176,000, thanks to your home’s new value after renovations!
If you’re considering a home renovation, RenoFi is hands down the smartest way to finance it.
Get started with your RenoFi loan hereMake Your Home Work for You
Financial planning isn’t limited to stocks and retirement savings only; your home can be a huge asset, particularly if you understand how to leverage its value effectively. You can boost your property’s worth by making key upgrades. This makes your home a powerful tool for building wealth and achieving your financial goals.
At RenoFi, we focus on connecting homeowners like you with experienced and trustworthy lenders who really understand your home projects. Our goal is to help you find the best financing options to make your renovation dreams happen.
Additionally, our RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage. Contact us today to learn more about how RenoFi can help you finance your dream renovation.