The kitchen of your dreams. A swimming pool. The ultimate man-cave.
These are examples of home improvements you might daydream about. You might even justify taking out a home equity loan to finance these dreams by saying upgrades will add value to your house.
Don't kid yourself - you will probably have trouble getting back as much value from these projects as you put into them. If you are really looking for a return on a home equity investment, you may be better off looking at more practical improvements.
Home Equity: What Works, What Doesn't
The problem is, the added value of extra square footage or special features is often subjective. Neighborhood home valuations may not support the worth of a larger home or one with high-end features (this is referred to in the appraisal industry as "over-improving for the area"), and features such as a pool are positives to some buyers but negatives to others. The surest form of payback comes from projects that can save you money before you even sell your home, but also add something to the price if you do.
Here are five examples of sensible uses for a home equity loan:
- Better insulation.Talk about a project with no wow factor - this is an improvement you can't even see. However, you will see the payback month after month in your bank account. Also, when it comes time to sell your home, better insulation could help potential buyers to qualify for an Energy-Efficient Mortgage. According to the US Department of Energy, an Energy-Efficient Mortgage can help home buyers qualify for a larger loan, because it takes into account the lower bills that come with more energy-efficient homes. Helping buyers qualify for bigger loans would only increase the potential pool of buyers for your home. In other words, new insulation may not be much to look at, but because it gives you an immediate payback in energy savings and a potential payback down the road in the sale price of your home, there is much more to insulation than meets the eye.
- Essential maintenance. Replacing a roof or damaged siding is the type of project people have a hard time getting excited about. After all, it can be quite expensive, but in the end your house doesn't seem to gain anything it didn't have before. However, this type of essential maintenance helps protect the structural integrity of your house, which can save you from far greater repair costs later on. Besides those savings, these external repairs can add to the curb appeal of your home when you go to sell it. So, essential maintenance may not seem to add anything to your home, but it can add to the payback on your home equity loan.
- New appliances. Old stoves and refrigerators can be a terrible drain on energy, and they also give your kitchen a decidedly out-dated look. Upgrades focused on energy efficiency can start paying you back immediately by cutting your energy bills, while the addition of newer equipment helps enhance the marketability of your home.
- Replacing windows. From the standpoint of getting some payback on a home equity loan, new windows are yet another example of a two-for-one deal - lower bills now, and value added to your home in the long run. Better glazing and seals on new windows can help reduce your energy bills, while switching to more modern window styles can update the aesthetic impression that your house makes.
- Equipment updates. Mundane updates like switching to lower-flow water fixtures can give you day-by-day savings that really add up. Another example is upgrading to a programmable thermostat. The Department of Energy estimates that if you can lower the target temperature for your heating system by 10 to 15 degrees for eight hours a day - which can be time when you are asleep or away at work - you can lower your heating bills by anywhere from 5 to 15 percent.
Okay, so you won't be inviting your friends over to show off these sensible home improvement projects. However, you will be able to see something your friends won't, and that's the savings to your bank account and the additional value of your home. Chances are, you will find a way to enjoy those payoffs.