People generally obtain a second mortgage because of an emergency, to buy something fun, or to make a profit. You don’t need us to tell you about your emergency or what you find fun, so now let’s focus on using your home’s equity to improve your overall finances, and why it may be better to use your equity than a credit card.
Starting a Business
Millions of Americans dream of starting their own business. The risks are high, and many small businesses unfortunately fail. But the rewards can be high, too. If you weren’t born rich, owning a successful business is one of the best ways to build your wealth.
If you are hanging out a shingle as a consultant or professional of any kind, it’s important to have a unique knowledge of the topic that people will really think is worth paying for. It’s not enough to have a passion for a field if you don’t have the skills to add value to your clients. If you’re planning on entering the field you’re already working in, talk to professionals you already know before making the leap. They’re likely to be honest, and you’ll want them on your side once you’re on your own.
In addition to your expertise, you need to become fluent in business as well. If you don’t have a detailed business plan – one that includes a marketing and sales strategy, a plan to manage cash flow, raise needed capital, and an exit strategy for when you will sell or retire, you probably aren’t ready to quit your day job… yet. For a sample business plan, visit the Small Business Administration. Then, go see your team. Your accountant can help you with the numbers and your lawyer can help you with the paperwork.
No matter how careful the planning, businesses are almost always much more expensive to start and run than we thought. Think about your worst-case scenario – then double it. That’s probably very close to the mark. What happens if sales don’t meet expectations? What happens if you must spend more on inventory, insurance, technology or staffing than you had anticipated? Once you have the business plan, compare it to your net worth and call your mortgage consultant. Make sure you can afford what you want to do.
While using a home equity loan to start a business may sound exciting because you get to make money without a boss and follow your dream, be sure you’re on solid ground before putting that dream into action. There are risks involved in any business, but you can minimize those risks by doing your homework creating a solid plan.
Stop and look around your house. Are you delighted with everything in it? This is where you spend a good portion of your day and where you and your family build happy memories. Are there certain renovations that would make your everyday life more rewarding? Remember, if you want your home to make a profit, the next person to buy it needs to see their dream home, too. A few improvements can make your day brighter and put money back in your pocket.
If you’re looking to improve your quality of life, then you probably know what you want to do to the house, based on your own lifestyle and what’s important to you. If you want to make a profit, consider relatively low-cost improvements that require little to no maintenance. They should immediately distinguish your house from similar homes and ideally also improve the energy efficiency of your home.
Here are four small-scale home remodel projects that can improve the resale value of your home. They’re excellent uses for your home equity line of credit (HELOC) and you may be able to save money by doing some or all of them yourself! Consult your tax advisor to determine if those improvements apply for tax deductions on top of energy savings and resale value.
- Replace the front door: There’s an adage in real estate that suggests features get tours, but the front porch gets sales. People make decisions on home-buying all the time by starting with a gut reaction and finding reasons to support it later. Upgrading an old, poorly-fitting front door with a newer energy-efficient model is a cheap, quick project that can instantly improve your home’s efficiency and aesthetic appeal. Best of all, hanging a door can be done in an afternoon, and has an ROI of 98%. Wow!
- Minor kitchen remodels: Replacing major appliances and installing new flooring is a difficult, time-consuming, and expensive task. Being without a kitchen for weeks on end can be a nightmare, but if you’re not happy with your kitchen, it might be time for a new one in any case, and a home equity loan can make it a reality. However, you might not need more than a few minor kitchen upgrades, like new cabinets, counter-tops, and energy-efficient cook-tops, which are comparatively inexpensive. The average spend here is just under $20,000 with an estimated return on investment at an impressive 80%. Just like with the front door, the changes are mostly aesthetic. People perceive a more modern-looking kitchen as being a better fit than a more “retro” look.
- Wooden decks: Outdoor space is one of the hallmarks of the current iteration of the American dream. Where else can a family sit and enjoy a frosty lemonade on a hot summer day? Watch the kids play in the yard while tending the grill on a beautiful wooden deck! The average cost of a new deck based upon a 16-foot x 20-foot wooden deck, is $10,000. The average return on investment is just over 80%. This is because of the perception of expanded living space at a reasonable price. Adding a deck costs about 16 $35 per square foot, while a square foot of inside space costs an average of $85. Decks are a great way to increase the play space for a modest cost.
- Convert an attic space into a bedroom: For most homes, the attic is an afterthought. It’s a place where unused craft projects and abandoned hobbies go to die. Turning an existing attic space into a spare bedroom or office, complete with its own bathroom, can be done for a slightly steeper price. Nationally, the average cost is just over $50,000. That includes constructing a room, extending utilities to it, and adjusting the exterior of the house to accommodate the new space. This remodel provides a 77 percent return on investment in resale value, with the potential for more. If you have adult children or relatives visiting from out of town, an attic room can be a wonderful guest room. You could also rent it out for additional income!
When you’re making improvements to your home, you’re not just making your life better in the short term. You’re also making an investment in your future. Ideally, the increase in the value of your home will exceed the cost of the improvement. If the ROI figures scare you, remember that you’re getting value out of the remodel along the way, and that the numbers are skewed by people pursuing projects they love that the next owners might not like. Pretend you’re seeing it for the first time. Do you want to buy it? Why or why not?
Credit Card Debt
Even if you don’t have much credit card debt, a home equity loan or line of credit can reduce your interest rate and bring down your monthly payments. In most cases, the interest on your second mortgage is tax-deductible. Talk about savings!
If you’re considering using this loan to pay off your credit card debt, it’s important to work with a reputable financial institution, because some of the consolidation companies can really harm your credit, and a few are simply scams. With a second mortgage, you can get enough money to pay off your credit cards and get the added benefits of avoiding default, which hurts your credit. This also enables you to keep your revolving credit from your cards available to you for use in a pinch.