Every home needs improvements at some point. Whether you’re looking to make repairs, cosmetic updates, or tackle a major home renovation, projects are usually a constant when you own a house, townhouse, or condo.
This work, however, can help you maintain or improve the value of what is likely your biggest asset. It will also make your home that much more enjoyable to live in.
For sizable projects, accessing your home equity might be one way to pay for those home improvements. There are two main ways to access the equity in your home: A cash-out refinance or a home equity line of credit.
Option 1: Cash-out refinance
If you’re thinking about refinancing your existing mortgage, you may want to consider a cash-out refinance. It allows you to take advantage of the equity that results from your monthly payments that have reduced the principal balance of your loan, or an increase in your home’s value.
Here’s how it works: You refinance your mortgage at your home’s present value, and get cash for the difference between the remaining balance on the old mortgage and the new refinanced mortgage. Essentially, you’re increasing your mortgage amount and getting the cash difference.
For example, assume the balance on your existing mortgage is $150,000, but your home is appraised at $250,000. You may be able to refinance for $200,000 and use the remaining $50,000 for repairs and upgrades.
Option 2: Home equity line of credit
A home equity line of credit (often called a HELOC) allows you to access equity you’ve built without having to refinance your mortgage. This may be a good option if you already have a great mortgage interest rate and don’t want to risk a higher rate just to access equity.
With a HELOC, you have access to up to a maximum balance approved by your lender. You have the flexibility to decide when to withdraw the money and how much to withdraw.
Home equity lines usually come with a variable rate, where the interest rate rises and falls with the prime rate, a standard index. But there may be other options available to you if you’re worried about rate changes. Wells Fargo offers the option to lock in some or all of the balance, a minimum of $10,000, with a fixed-rate advance. Our lines of credit also offer rate caps, to limit how fast and how high the interest rate on a variable rate line of equity may rise. Your Wells Fargo Home Mortgage professional can help walk you through your options.
Interest on both a refinanced mortgage and a home equity line of credit may be tax deductible — consult your tax advisor to be sure.