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Remodeling a home can offer increased equity


Homeowners have been borrowing against their home’s equity as a standard practice for years, embarking on anything from remodeling projects and vacations to college savings and emergency funds. However, tough economic times witnessed declines in home equity, or worse, many were facing the possibility of losing their homes altogether — creating a general distaste for using equity for borrowing purposes.

Finally we are seeing the light at the end of the tunnel. With the job and housing market in recovery, interest rates hit historic lows in 2012 and borrowing has been on the rise. Moreover, limited inventory in the housing market is pushing up the values of most homes — making home equity lines a viable option again.

Equity lines are becoming especially attractive to current homeowners who are not finding suitable replacement homes. Improved rates and increased equity enable them to draw a credit line out of their homes — a comfortable route for those that would rather not compete in a bidding war for a new home. The extra funds allow them to embark on remodeling projects, creating their desired home rather than searching for a replacement.

This option makes sense when you consider that a more expensive home provides you with less equity. Using the equity you already have to make your current home fit your needs ultimately increases the value of what is likely your largest investment.

Eventually the funds you put into a project can pay off. “Despite having the highest construction costs in the country, the Pacific region once again led the nation with an average cost-value ratio of 71.2 percent, due mainly to strong resale values,” stated a Remodeling Magazine article regarding 2013 remodeling trends.

Interesting insights from the Remodeling Magazine’s annual cost versus value report (which compares the average cost of popular remodeling projects with the value those projects retain at resale) in the Pacific region for 2013 included:

1. Deck additions recouped 96.1 percent of the cost (with an average construction cost of $11,116), adding $10,682 to the resale value, on average.

2. Minor kitchen remodels recouped 90 percent of the cost (with an average construction cost of $21,094), adding $18,985 to the resale value, on average.

3. Major kitchen remodels recouped 81.1 percent of the cost (with an average construction cost of $60,865), adding $49,366 to the resale value, on average.

4. Bathroom remodels recouped 79.6 percent of the cost (with an average construction cost of $18,570), adding $14,791 to the resale value, on average.

5. Bathroom additions recouped 69 percent of the cost (with an average construction cost of $43,852), adding $30,262 to the resale value, on average.

Consumers are taking notice. According to the National Association of Home Builders (NAHB), remodeling is on the rise. The Remodeling Market Index (RMI) averages ratings of current remodeling activity with indicators of future remodeling activity. The third quarter of 2013 saw the national RMI rise to its highest reading since the first quarter of 2004, while the western region topped the charts with the highest RMI.

“In addition to existing home sales, which support remodeling activity as owners fix up their homes before and after a move, remodeling has benefitted from rising home values,” said NAHB Chief Economist David Crowe. “This boosts home equity that owners can tap to finance remodeling projects. We expect existing home sales and house prices to increase, but at a slower rate over the next year, so the demand for remodeling services should also increase, but more gradually over that period.”

The expense of many remodeling projects can pose a problem to those who don’t have cash in hand for financing. Enter the home equity line. Its beauty lies in the fact that you don’t pay on it until you use it. There is a limit that cannot be exceeded, but funds can be pulled from the line whenever necessary and interest is applied to only the amount currently being borrowed. When the funds are paid back, the line still exists for future use or a rainy day.

It goes without saying that the best time to apply for a loan is when you don’t need it. Most people apply when they’ve hit financial hardship. But it is naturally harder to get approved for a loan during those times. Those who are remotely interested in remodeling can apply for a home equity line and use it — or not. At the very least it is available for that dreaded rainy day — whether that is a leak in the roof, a loss of a job or a remodeling project that goes haywire.

Kimo Rosa is the assistant vice president of lending for Clackamas Federal Credit Union.