An Equity Loan, Types, Amounts & Qualifying
If you can afford some extra monthly payments, there are various home loans, or equity loan types, available to finance your project.
Home Equity Loan
This loan allows you to borrow against the equity in your home.
You are given the entire amount of the loan all at once.
Payments are due monthly for a fixed number of years. The interest rate may be fixed or adjustable.
Home Equity Line of Credit
Here, you have a certain amount of money available to you.
You can borrow as much as you would like at any time, up to the maximum line amount.
The interest rate is variable and thus can fluctuate. This is similar to using a credit card and making monthly payments. The difference is that credit card interest is compounded daily, while a Home Equity Line of Credit is simple interest.
Interest is usually tax deductible.
How Much Can I Borrow?
The amount that you are allowed to borrow for either one is determined in the same way. Financial institutions used to normally lend up to 90% of the appraised value of your home, less any liabilities, such as a mortgage. Some would go as high as 100%.However, things have changed. Instead of lending 90%, that figure is now 60% to 100%, based on the financial institution's policy and economic conditions.
For example, let's assume your home is valued at $300,000, and you have a mortgage of $100,000. Take 80% of the value of your home and subtract your mortgage ($240,00 - $100,000). The resulting $140,000 is the maximum loan amount. If you have no mortgage, you may borrow the full $240,000.
Home Equity Loan Qualifications
In addition to the amount of equity in your home, qualifying for a loan is based on your credit score and your income. Higher credit scores lead to better rates.
Generally speaking, banks will lend you 45% to 50% of your monthly gross income, less any debt payments on your credit report. Debt payments would be money you owe such as mortgage payments, taxes, monthly car loan payments, credit cards minimum payments, etc.
For example, let's say you have a gross monthly income of $10,000. You have monthly payments due for your mortgage, car loan, and credit card totaling $3500. You would then take 50% of your monthly income ($5000) and subtract your monthly payments ($3500). This would be your allowable monthly loan payment.
In this case, you would be eligible for a loan with maximum monthly payments of $1500. To see the the maximum loan amount for this example, use an online amortization calculator.
Loans For Landscaping Projects
Since you have a relatively firm price for the landscaping, you might go with a fixed rate Home Equity Loan. This way, there will be no surprises with interest rate changes.
Home improvements are considered capital improvements. Therefore no taxes have to be paid on project costs.
Equity Loan and Home Value
Landscaping can be expensive. In addition, it usually will cost more than you think. However, it is worth it to make this investment in your home. Not only will you enjoy it yourselves, but also adds substantial value to your home.
Recently there was a study done by Money Magazine and the American Society of Landscape Architects. It was determined that a homeowner will get 100% to 200% of his investment back upon selling the home. This seems to be at the higher end when natural stone products are used in areas such as walkways and patios.
As an example, if you were to install a patio with concrete that cost $5000, this amount would be added on to the value of your home. However, if your patio was made out of a natural stone such as bluestone, and it cost $12,000, the amount added to your home value would be $24,000.
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