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This Family Chose Renovation Over Moving. Here’s How To Use Home Equity To Take Your Current Home From Drab To Fab

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This Family Chose Renovation Over Moving. Here’s How To Use Home Equity To Take Your Current Home From Drab To Fab

Courtesy of Marina Vaamonde

Marina Vaamonde (pictured with her family) needed more space at home. But due to a challenging market, the Vaamondes chose to renovate instead of move.

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When Marina Vaamonde and her family began shopping for a new home last year, they ran into a common problem in today’s real estate market — low inventory and high prices.

Vaamonde wanted an upgrade of their Houston, Texas, home with more space for her family and a workspace for those days when she was working from home. But finding something that met their needs in their current area proved difficult. The Vaamondes decided to renovate their current home to meet their needs.

Remodeling allowed them to stay in the same neighborhood close to the kids’ school and was a smaller financial commitment than buying a new home. “I am glad that we stayed and remodeled and didn’t just jump into buying something,” Vaamonde says. 

The Vaamonde’s experience isn’t unique. A pandemic-fueled rise in remote work increased the need for more space at home. With many homeowners unable or unwilling to pay today’s elevated prices to move to a larger home, more homeowners have turned to renovating their existing space as a solution. With home values skyrocketing, homeowners are sitting on a well of tappable equity that can be used to finance a home remodeling project. 

But before you jump into a big renovation thinking it will be cheaper or easier than purchasing a home, here’s what you’ll need to consider and how to fund the project. 

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What to Consider Before Remodeling

Having a clear understanding of your long-term goals is an important first step when making major changes to your home. “What are your plans with this home after the renovation is complete?” asks Angela Moore, CFP and founder of Modern Money Education, a financial education firm. 

If you plan on living in your home long-term the upgrades you invest in may be different than if you plan on selling your home in the next few years or renting it out. Regardless of what specific parts of your home you want to remodel, the planning process will be similar.

Budget Extra Money

Supply chain disruptions and labor shortages have increased the cost of building materials. When pricing out a remodel, expect to pay more than you would have a few years ago.

But even under normal circumstances, you’ll want to budget for the unexpected when upgrading your home. “You always have to have a buffer, because there’s always some unforeseen thing that pops up,” Moore says. Vaamonde is also a real estate investor and always plans for renovations to cost 20% to 25% more than the quoted price.

Consider How Long You Can Go Without the Space

There is a cost to remodeling a home that goes beyond the sticker price. Take into consideration the hassle and potential expense of not being able to live in your home or use certain areas for an extended period of time. You may have to deal with noise, dirt, and people coming in and out of your home all day.

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Given the additional delays you’re likely to experience right now, it may influence your renovation decisions. Vaamonde wanted to update the kitchen as part of the renovations, but ended up deciding against it. “When we started looking at pricing and how long I possibly would be without a kitchen. I just couldn’t push myself to go that route,” Vaamonde says. Just replacing some flooring, updating the bathrooms and creating a small workspace in a hallway took four months, she says.

Find a Good Contractor

Vaamonde hired a contractor she had worked with before. “What I like about him is he’s not the cheapest, but I know that he’ll get the work done well,” she says. She was also aware going into it that the project would probably take longer because this contractor is typically in high demand and is managing multiple projects at the same time. But it was worth it because she felt she could trust him to get the job done without any additional supervision.

When shopping around for a contractor, look for reviews and see if you can find references from former clients. If possible, find pictures of previous work or go and see it first hand. It’s extremely important to research a contractor before giving them any money or signing a contract, Moore says. Ask lots of questions about the cost, timeline for the remodel, and whether or not you’ll need to obtain permits.

How to Use Home Equity to Pay for Renovations

As home values have surged, more homeowners have the option of using their home’s equity to finance renovations. 

Converting your home’s equity into cash can be a great way to pay for a remodel if you don’t have the extra money on hand or don’t want to tap into your savings. Common options for borrowing against your home equity include:

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  • Cash-out refinance
  • Home equity loan
  • Home equity line of credit (HELOC)

There are pros and cons to each type of financing, so it’s important to understand your options. “When looking at financing, there are a lot of different ways to do things. And the right way just depends on your situation,” Moore says.

A cash-out refinance replaces your existing mortgage with a larger home loan and you pocket the difference. When interest rates are lower than your current mortgage rate this makes more sense because you’re lowering your interest rate on the entire loan amount. 

When interest rates are higher than your existing rate, you may only want to keep your mortgage and take out a smaller secondary loan. A home equity loan allows you to keep your existing mortgage, while borrowing against your home’s equity with a separate fixed-rate loan.

A HELOC is similar to a home equity loan except it will usually have a variable interest rate. However, with a HELOC you won’t get the money in one lump sum. Instead, you’ll have a set limit you can borrow and you can withdraw the money as needed. This way you’ll only pay interest on the money you withdraw, rather than paying interest on the entire amount from day one.

Pro Tip

Build room into your renovation budget for unexpected expenses and delays, especially given the supply chain disruptions and labor shortages we’re currently facing.

Consider the Risks of Borrowing Against Your Equity 

Anytime you borrow money to pay for home renovations it’s important to understand the risks and to consider all of the costs. 

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When you use your home as collateral to borrow money it is considered a secured loan or secured line of credit. This type of lending is less risky for the bank and typically has lower interest rates. The downside is, if you default on the loan, you could lose your house. Also, if you increase the amount of money you’re borrowing, you’ll have a smaller profit on the sale or in a worse case scenario, could owe money at closing if the housing market drops (although experts don’t expect home prices to crash).

When comparing lenders and weighing the advantages and drawbacks of each type of home-equity financing, take a look at the overall cost — not just the interest rate. The upfront fees, or closing costs, associated with home-equity financing can be 2% to 6% of the loan balance. Depending on how much you’re borrowing, that can be thousands of dollars in fees. By comparing offers from a handful of lenders you can ensure you’re limiting your out-of-pocket fees while getting the best rate possible.

Some home equity lenders waive the closing costs or give lender credits. Be sure to ask about this when shopping between lenders. 

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Our Family Achieved FIRE At 39 And 41 On Salaries Of Under $100K A Year. Here’s How We Did It

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Our Family Achieved FIRE At 39 And 41 On Salaries Of Under $100K A Year. Here’s How We Did It

Courtesy of Amon and Christina Browning

Amon and Christina Browning achieved financial independence in eight years on salaries of under $100,000 each by layering in additional streams of income.

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

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Amon and Christina Browning had no idea FIRE (Financial Independence, Retire Early) was a movement. They just wanted to do whatever it took to quit their jobs.

“It was really hard to find information on FIRE when we started,” says Amon. “When we started our journey in 2011, we weren’t thinking of it as ‘financial independence, retire early.’ What has become the FIRE movement, I think, is a title put on something people have been doing forever—basically, amassing enough assets to support their expenses so that they don’t need to work anymore.” 

Amon and Christina Browning

The Brownings officially achieved FIRE in 2019, at 39 (Amon) and 41 (Christina), with $2.5 million in investment assets. Without FIRE information readily available, the Brownings house hacked, did retail arbitrage, drove for Uber, sold items on Etsy and Facebook Marketplace, made money listing on Airbnbs, and flipped houses. It took eight years, but they hit their FIRE number. 

Once retired, The Brownings moved their family of four from the San Francisco Bay Area to Portugal, where they now live well on a $2,000 a month budget. They’ve built an online education company, an Instagram page of over 100,000 followers, and a YouTube channel with 606,000 subscribers to share what they’ve learned with others.

Here’s the advice the Brownings have for anyone curious about achieving FIRE – and what to do if you feel off track to course-correct and turn your financial goals into reality. 

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To Launch Your Freedom Plan, Calculate Your FIRE Number

Your FIRE journey begins the day you crunch the numbers and face your goals head-on.

The first thing the Brownings did was calculate their FIRE number: the amount of money you need to have in active investments to live off of the returns after you quit working. A simple formula touted by many FIRE enthusiasts is to take your annual expenses and multiply them by 25:

Annual Expenses x 25 = FIRE Number

This formula became popular after the release of the Trinity Study, a research paper that popularized the idea of the 4% rule. Build enough wealth to where annual gains offset a 4% annual withdrawal and you’ll have what you need to retire at any age.

The Brownings started their FIRE journey as federal government employees with modest salaries. Christina was an attorney making $70,000 a year, and Amon was an urban planner earning $98,000 a year. They lived in Oakland, where the cost of living is 49% higher than the national average, and wanted to have the option to continue living there in retirement. They estimated they would need about $100,000 a year in living expenses; based on the above formula, their FIRE number was $2.5 million.

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“When we started to learn about creating financial independence, we learned how you calculate your FIRE number, how much you need to live off of a stock portfolio, and even invested in real estate,” says Christina. “For us, it was about saving more and learning about investing—to try and invest right.”

The Brownings’ advice is to

  • Know where you want to retire
  • Calculate the cost of living in that community
  • Understand how much you currently make – and how much additional income you’ll need to reach your goal retirement date
  • Educate yourself on what combination of investments can get you to your FIRE number 

Falling Short? Find Ways to Close the Gap 

Even after you calculate your FIRE number and start taking action, unexpected expenses or an increased cost of living can throw you off track. In 2015 – four years into their FIRE journey – the Brownings realized they needed to make more money if they wanted to retire by 40.

“We were house hacking, at one point even drove for Uber,” says Amon. “We sold things on Etsy and had an Etsy store, invested in real estate, and had three Airbnbs going. Every additional dollar we made outside of our jobs was thrown into investments. We looked at our nine-to-five jobs and said, ‘Okay, we just can’t do it with these jobs; we have to find different ways to produce more income.’”

From 2015 to 2019, the Brownings found success with earning extra income through real estate—it jumpstarted the FIRE process for them. They found creative ways to make more money and eliminate expenses; one of those approaches was to do what they call “house hacking.”

The Brownings would find properties that had been sitting on the market for a long time. These properties needed renovations, but were things the Brownings could fix. They bought distressed properties, did all of the renovations themselves, lived in them for a while, rented some out, and then sold the properties for a profit. They did all of their own flips. 

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Related: People Are Turning to Fixer-Uppers In Today’s Ultra-Competitive Housing Market. Here’s What the Creators of ‘Cheap Old Houses’ Want You to Know

Another example of house hacking involved the Brownings renting a three-bedroom apartment, living in one room, and renting out the other two. Altogether, these streams of income enabled the Brownings to live on 30% of their monthly income and invest the other 70%. They credit their house hacking, side hustles, and money saving-strategies as the way they were able to get to FIRE sooner. 

The Brownings’ advice is to find the opportunities to earn more that don’t require a significant investment of time or money. They suggest that you might be able to rent a room on Airbnb, downgrade or sell material possessions, or start a side hustle. 

Pro Tip

Find a side hustle that don’t require a significant investment of time or initial capital to free yourself up.

To Achieve FIRE Faster, Invest Your Money

FIRE participants tend to favor index funds and total market funds. Amon and Christina invested money every week into the stock market, and any lump sums they got from a side hustle or sale of real estate also would be invested. 60% of their portfolio was invested in Vanguard’s Total Stock Market Index Fund (VTSAX). It’s an index fund that tracks the performance of the entire stock market. 

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“The whole plan was to have investments that were passive and didn’t require too much thought,” says Christina. “We decided that the VTSAX Index Fund would make up the bulk of our portfolio, and we would add little pieces.” 

“Regardless of all the madness or craziness that was going on in the world, we consistently stuck to our investment plan,” adds Amon. “We wanted to build a portfolio that could not only sustain us to get to FIRE, but also keep us financially independent for decades to come, and even to the point where we could leave that money to our children.”

Today, besides the VTSAX index fund, the Brownings’ portfolio includes other index funds, a couple of individual stocks, exchange traded funds (ETFs), and passive income from real estate. They own sector ETFs that complement their portfolio by providing more dividends and technology ETFs like the Vanguard Information Technology index fund (VTG). 

Living the FIRE Lifestyle 

After eight years of making more money and investing everything they could, the Brownings achieved FIRE in 2019. They celebrated reaching their FIRE goal by quitting their jobs.

“When we hit our FIRE number, we went in to work and put in our two-weeks notice,” says Amon. “We quit. We didn’t fully celebrate until later.”

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Upon retiring, the Brownings had some time to reflect. They decided to leave the United States and relocate their family to Portugal. They bought a home for 190,000 euros in cash, a property that they currently list on Airbnb, and are building a tiny house that they’ll rent out. Their cost of living in Portugal is less than $2,000 a month, and their Airbnb income covers their living costs, further preserving their nest egg. 

“We live on an acre of land on the Silver Coast of Portugal, working on our farm,” says Christina. “We spend time at the beach and travel a lot. We’re still parents and meet with our network of friends. We have so much freedom that we didn’t have working jobs.”

The Brownings maintain a financial education company and create content on YouTube and other social media channels, but they do it because they enjoy being financial educators—not because they have to work.

“We believed that we could do this,” says Amon. “We believed it and we stayed consistent. There are some negative things in the world that could stop you from moving forward.”

If you’re curious about FIRE, all you need to start your journey is one number – and a belief, adds Amon.

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“Have the mindset that you can do this.”

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This Family Beat A Higher, All-Cash Offer On A Dream Home. 5 Expert Tips To Help You Win In Today’s Competitive Market

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A photo to accompany a story about buying a home in a competitive housing maret

Courtesy of John and Tarryn Melkonian.

John and Tarryn Melkonian pictured here with their children. The Melkonians were up against multiple bids on their dream home, one that was higher and all-cash. Here’s how they came out on top.

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

Massachusetts homebuyers John and Tarryn Melkonian found themselves facing a very common and stressful scenario in today’s intense real estate market.

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They fell in love with a house that had 10 other offers, one of which was a full-cash bid that was higher than theirs. 

“We really fell in love with the house. We didn’t want to let it go,” said John Melkonian. 

The housing market is as competitive as ever. And homebuyers are feeling the pressure.  

Home inventory is shrinking, and homes are selling faster. According to Realtor.com’s latest real estate data, inventory is down 26.8%, and homes sold 11 days faster in 2021 compared to 2020. Mortgage interest rates have been rising lately, pressuring homebuyers to move quickly to lock in the best mortgage rate possible.

But the Melkonians still managed to land their dream home despite the tough competition. They worked with their realtor to craft a strong offer that won out — even though it wasn’t the highest.

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How, exactly, do you pull that off? It depends on your specific market and house, but real estate experts say there are a number of tools you can use to navigate today’s highly competitive real estate market successfully. Here are five expert tips and more on how the Melkonians won their home bid.  

5 Tips for Buying a Home In This Competitive Real Estate Market 

Making a successful offer on a home starts before you even begin house shopping. Be sure to check these steps off your list before you wade into the market.

1. Get Preapproved

Before you even think about making an offer in today’s highly competitive market, you’ll need one crucial document: A preapproval letter. This is a letter from a lender that says how much of a mortgage you qualify for, and consequently, how much you can offer on a home. 

“You don’t want to get out there and start looking at properties you can’t afford,” said Candice Pagliarulo Hodgson, owner and principal broker at Lyv Realty in the North Shore, Massachusetts area.

With today’s low interest rates, you might even be able to afford more than you initially thought. But going through the pre-qualification process is the only way to know. “It’s your compass,” Pagliarulo Hodgson said.

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Plus, preapproval letters are basically a requirement for making an offer on a home, because they show the sellers you’re a serious buyer who can pay what you’re offering.

2. Work With an Experienced Realtor You Trust

Finding a real estate agent who you align with and trust is one of the most important things you can do. Spend time shopping around for a realtor just as you would anything else: Do your research and check out reviews from past clients.

You can even schedule “buyer consults” — basically, an introductory conversation — with multiple realtors and choose who you like best, Pagliarulo Hodgson suggests. 

“It’s very, very important as a buyer to really be represented by a very reputable, long standing firm and a realtor with lots of experience. That’s number one. You need somebody who’s been through this market before,” said Lisa Van Wagenen, Miami Realtor at Brown Harris Stevens. 

It’s not just about finding someone you feel comfortable with. Each agent also has different areas of expertise and different professional networks that can make all the difference when submitting an offer.

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The Melkonians found a buying agent they felt comfortable with. She was “instrumental in getting us a new house” and “was a fantastic experience,” said John. 

Having a strong reputation between the buying and selling agents carries a lot of trust and weight, said ​​Pagliarulo Hodgson.

Finding an experienced agent also goes a long way in protecting you as the buyer. Make sure your realtor has a good understanding of home contracts and knows how to safeguard your money and interests throughout the legal process. “It’s the most important thing,” Van Wagenen said.

3. Be Patient and Don’t Panic Buy

The Melkonians spent time browsing online and didn’t attend any open houses until they were serious about a house. When they found “the one,” they were prepared to move quickly with an offer. They left room to negotiate but stay under budget. “We were willing to go a little bit higher,” John said.   

Because buying in today’s market is so competitive, Pagliarulo Hodgson tells all of her clients to be prepared to compete against 10 or 20 other offers, and set a limit ahead of time on how much they’re willing to spend.

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Pro Tip

Before you get carried away in todays’ highly competitive market, set a realistic limit on how much you’re willing to spend — and stick to it.

Van Wagenen is also keen on educating her buyers on the local real estate market so they understand which homes are a good value and which are simply overpriced.

Even so, it can be hard to resist the urge to outbid others if it means securing your dream home. Pagliarulo Hodgson suggests grounding yourself in the numbers to make sure you don’t go overboard.

“Make sure that it fits within your comfort zone for [your] budget monthly. And make sure you’re making an offer that you can live with,” Pagliarulo Hodgson said. Put another way: “What number are you okay with losing this house at?”

4. ‘Show Me the Money’: Earnest Money & Down Payment

Making an offer on a home isn’t free: Buyers usually submit what’s known as an “earnest money” or “escrow” deposit, representing about 5% to 10% of the purchase price, along with their bid. This is another way to show a seller you’re serious and have money available.

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But more important than the earnest money deposit, said Pagliarulo Hodgson, is the size of the down payment you’re offering — which can be anywhere from 5% to 20% of the purchase price, or more. (The earnest money deposit eventually becomes part of the down payment at the closing).

“The more money you’re able to put down, the stronger of a buyer you are considered to be,” said Pagliarulo Hodgson. While making a cash offer isn’t possible for everyone, cash is king in the form of a down payment, too. The more you promise to contribute toward the purchase of your home, the more likely a seller is to accept your offer, Pagliarulo Hodgson said.

Cash-strapped homebuyers can boost their bid by applying for a first-time home buyer grant or down payment assistance program. Adding a down payment grant to your offer package can help you compete by appearing more marketable, especially when up against similar bids with larger down payments. 

Here is a complete list of first-time home buyer programs available by state.  

5. Make a Strong Offer

There are many nuances and strategies that contribute to a strong offer — and they’ll vary based on where you live and the specific home you want to buy. Here are some strategies from the experts we talked to:

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Waive contingencies: 

In Pagliarulo Hodgson’s market right now, a strong offer could be defined as someone who’s willing to waive the home appraisal. For example: If you bid $500,000 on a home, but it’s only worth $475,000 in the eyes of your lender, you would promise to front the difference (in this case, $25,000) in cash so that your loan doesn’t fall through.

“Your offer is much more solid knowing that the appraisal isn’t a contingency or a concern for the seller,” Pagliarulo Hodgson said. 

This is otherwise known as adding an appraisal gap clause where the buyer commits to cover some or all of the appraisal difference. It’s crucial to only commit if you have the financing to cover it and still remain within budget. If you over-commit you could end on the hook for more than you can afford. 

Research and construct a tailored offer

It’s also crucial for the buyer’s agent to tailor the offer to the specific sellers, said Van Wagenen. 

“You want your agent to do a little homework before you send your offer in writing to them,” she said. Have they turned down other offers? Why? How soon do they want to close? Answering these questions can help you craft the strongest possible offer for those sellers, Van Wagenen said.

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Be ready to move fast: 

Get offers in quickly and to show sellers you are serious. “Sellers want the path of least resistance,” Van Wagenen said. 

In the Melkonians’ case, their offer included: Conventional financing, waived inspection, willing to close quickly, and no contingencies, such as the sale of another house that could hold up the closing, said John.  

Create an emotional connection: 

It helps to leverage an emotional connection between buyer and seller. Write a sincere introduction through a heartfelt letter. Include what you like about the home. Seller’s holding onto the home’s sentimental value don’t want to sell their house to someone who plans to change the whole thing or flip it. 

The Melkonians were up against a higher bid that was all-cash. “[Our realtor] did a great job writing a letter to the seller and telling them all about us,” John said. “The presentation made quite a bit of difference.” 

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