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Housing inventory is low. Here's what owners should do now.

Amid scarce home inventory, current homeowners may want to use a home equity loan to renovate their existing home. Getty Images/iStockphoto

Current homeowners looking for a bigger house may need to wait a little longer before making the move. That's because the available housing inventory is scarce, according to a new report. Specifically, the number of homes for sale in 2023 fell in 21 of the 50 largest metropolitan areas compared to this time in 2022. 

Fewer available homes, elevated home prices and significantly higher mortgage interest rates have combined to drastically reduce the options for prospective homebuyers. In this environment, the options are limited, particularly for current homeowners locked in with mortgage rates hovering near historic lows. For these owners, it may make less sense to move and more sense to improve and renovate their current homes.

A major home renovation or repair can actually boost your home's value while also making it more comfortable and enjoyable to live in while you wait for market conditions to change. Fortunately, there are multiple ways owners can pay for these improvements.

Start by exploring your home equity options here now to see how much you're eligible to receive.

Why homeowners should use their home equity now

In today's market, many homeowners would be better served staying put and working on their current home to improve its value for the day when they can eventually buy something else. Home renovations, particularly the right ones, can dramatically increase the value of your home. Here are two ways owners can finance these projects:

Home equity loans

By using a home equity loan, owners can withdraw a lump sum of money from the equity they've built up in their home.

Home equity is calculated by the amount of money you've paid toward your mortgage balance combined to the current value of your home. So if you've paid $100,000 of your mortgage but your home's value has since increased by the same amount, you'd have $200,000 of equity to utilize. Lenders typically let you borrow 80% to 85% of that amount.

Home equity loans usually have lower interest rates than personal loans and credit cards, although you'll have to pay interest on the full loan amount. That said, interest paid on a home equity loan is tax-deductible if utilized for IRS-eligible home improvements and repairs, making this a cost-effective way to finance these particular types of projects.

Explore your home equity loan options here now to see if this makes sense for you.

Home equity lines of credit (HELOCs)

HELOCs operate similarly to home equity loans, albeit with some differences. Unlike a home equity loan, a HELOC works more like a credit card does by providing the borrower with a revolving line of credit.

This can be beneficial because borrowers only pay interest on the amount they use - not the full amount they're approved for (as they do with home equity loans). That said, interest rates on HELOCs are generally variable, so the rate the owner gets once their application is approved may not be the rate they keep long term.

HELOCs also benefit from the same interest tax deduction home equity loans do. "Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS explains. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."

Other options

Home equity loans and HELOCs aren't the only viable options for homeowners currently looking to finance major home projects and renovations. Reverse mortgages may be worth looking into for older homeowners (age 62 and above), and cash-out refinancing could be a worthwhile option for owners with higher interest rates.

With a cash-out refi, owners take out a new mortgage loan in an amount greater than what they currently owe. They then pay off the first loan with the second one and take the difference between the two as cash. If this sounds beneficial to you, start exploring your refinance options now to learn more.

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