How to Use a Home Equity Loan for a Remodel

Using a home equity loan can be a smart way to finance your home improvements.

This type of loan allows you to borrow against the equity you’ve built in your home, and can provide the funds needed for everything from minor cosmetic updates to major renovations.

However, it’s essential to understand the benefits and risks, including the possibility of losing your home if you can’t repay. 

This guide will help you navigate the process of using a home equity loan for your repair, remodel or renovation project, covering important considerations and alternative financing options along the way.

How does using a home equity loan to pay for a remodel work? 

If you’re looking to make your living space more enjoyable or raise your home’s resale value, a home equity loan can help you pay for a remodel. A home equity loan is a second mortgage on your home that lets you tap into your home equity. Home equity is the difference between your home’s worth and what you owe on your mortgage. 

If you have equity in your home, you may qualify for a home equity loan for up to 85% of the home’s value. The lender determines the percentage based on the loan-to-value ratio (LTV) and your equity. Here’s how that works.

Let’s say your home is worth $400,000, and you still owe $150,000 on your mortgage. If the lender sets the LTV ratio limit at 85%, here’s how to calculate how much you may be able to borrow:

$400,000 (value) x .85 (LTV) = $340,000 amount available to borrow

$340,000 – $150,000 (remaining mortgage amount) = $190,000

This is the maximum home equity loan amount you could borrow.

Can you use a home equity loan for a home renovation? 

You can also use a home equity loan for major home renovations. For example, you may want to renovate the kitchen and bathrooms, finish the basement, or open up your floor plan. If you plan to stay in your home once you retire, you might use the funds to widen doorways or transform your downstairs into the main living space. 

A home equity loan can fund renovations in areas that will boost your home’s resale value. For example, you may add a third bedroom or use the funds to renovate an outdated kitchen or bathroom.

When shopping for a home equity loan, below are factors to consider:

• Look for affordable interest rates and monthly payments that fit your budget
• Know the length of the repayment term
• Factor in fees or points that can add upfront costs
• Check on prepayment penalties 
• Compare different lenders for the best rates and terms

Depending on the cost of renovations, a personal loan may be another option. However, home equity loans generally have lower interest rates than personal loans. 

Can you use a home equity loan for home repairs? 

When a home repair costs thousands of dollars, a home equity loan can help you fix the problem fast if you don’t have the cash. Foundation repairs can cost up to $15,000—or even more. Installing a new roof costs an average of $9,000, and a high-end roof on a large home can cost more than $47,000.

Many necessary home repairs are dangerous and can’t wait until you save money to fix them. When that happens, a home equity loan can save the day. Once you get the funds, you can hire someone to perform repairs immediately. Then, you pay off the loan over time.

Another option to pay for home repairs is charging them to a credit card with an introductory 0% rate that lasts several months. Your home repair company might even offer financing at 0% interest for a few years. However, once the promotional period ends with these options, you’ll pay a much higher interest rate, which can add hundreds or thousands of dollars to the balance.

Pros and cons of using home equity for home improvement 

Getting a home equity loan may be just what you need to pay for a remodel. However, it’s important to consider the advantages and drawbacks of home equity loans before taking out a second mortgage.

Pros

• Can help pay for a remodel, renovations, and repairs

• Often have a fixed interest rate

• Generally have lower interest rates than credit cards or personal loans

• Loan interest may be tax-deductible

• Loan terms may be up to 30 years

Cons

• Need at least 10% – 20% equity in your home to qualify for a home equity loan

• Could lose your home if you default

• Not as flexible as a home equity line of credit (HELOC)

• Additional debt could harm your credit score

• Loan balance may be due in full if you sell your home

The most serious consequence of taking out a home equity loan is potentially losing your home to foreclosure if you default. Before applying for a home equity loan, ensure you understand the total cost, including any points or fees.

Home equity loan vs. HELOC for home improvement 

If you have 10% to 20% equity in your home, a home equity line of credit (HELOC) is another option to consider when paying for a remodel or major renovations. A HELOC is a revolving line of credit. The credit limit is also determined by the equity you have in your home and your credit profile.

With a HELOC, you borrow money when you need it and repay it with monthly payments, much like a credit card. HELOCs have a draw (borrowing) period that can last up to 20 years and a repayment period ranging from five to 30 years. Unlike a home equity loan, which often has a fixed interest rate, HELOCs usually have a variable rate.

The table below compares home equity loans to HELOCs.

Home equity loan	HELOC
Borrow against equity in your home	Borrow against equity in your home
Often a fixed interest rate	Usually a variable interest rate
Fixed loan and repayment terms	Revolving line of credit; separate draw and repayment periods
Can use funds for remodeling, repairs, or renovations	Can use funds for remodeling, repairs, or renovations
Need 10% – 20% equity in your home to qualify	Need 10% – 20% equity in your home to qualify
Additional debt may lower your credit score	Additional debt may lower your credit score
You could lose your home if you default	You could lose your home if you default
Repayment in full often due when you sell your home	Repayment in full often due when you sell your home

Our expert’s advice

Erin Kinkade

CFP®

Consider your needs. If you want to make minor updates that are not critical and have a lower cost, I would recommend using your cash reserves to fund the project if possible. If you don’t have adequate cash reserves but have a reliable source of income and excess cash flow, I suggest waiting to make minor updates (if you have time on your side) and, therefore, saving up for the project or using a 0% introductory credit card with a plan in place to pay off the amount charged before the introductory period ends. I recommend this because costs are associated with a home equity loan that may not be cost-effective for smaller projects that may not be worth placing your home at risk of foreclosure if you can’t repay the loan per the repayment agreement. For the larger project, especially if it’s more critical, I suggest using a home equity loan or HELOC (a HELOC may provide expedited funding over the home equity loan). In both cases, it’s important to understand the terms of your loan and be able to repay loan to avoid damaging your credit or losing your home. 

How to get a home equity loan to finance a remodel 

You can apply for a home equity loan with your current mortgage lender or shop around for the best home equity loan rates and terms. Once approved, you’ll get the loan amount in a lump sum. 

You may be able to get a lower interest rate on a home equity loan with your current mortgage lender. But it pays to shop around and compare loan rates and terms with various lenders. You can often apply online to view offers with no hit to your credit.

As mentioned above, lenders base home equity loan eligibility on LTV. They’ll also consider your credit history, current credit profile, income, and how much debt you already have.

If approved, you’ll get a lump sum—sometimes within a few days. Then, you can use those funds to pay for your project.

After you get the loan funds, you’ll make monthly payments during the repayment term, which may be up to 30 years, depending on the lender and your credit profile.

Meanwhile, you can get started on that home remodel to improve your enjoyment of your home or boost its resale value.

Alternatives to a home equity loan to remodel your home

In addition to a home equity loan or HELOC, you may be able to pay for a remodel using other types of credit. Cash-out refinancing of your home creates a new loan with new interest and repayment terms. With this type of refinance, you take out a loan for a larger amount than you owe on your mortgage. You pay off that loan with the new one and keep the extra cash.

You might also consider a personal loan if you can get better terms and the remodel is not expensive enough to take out a second mortgage. However, personal loans typically have higher interest rates than home equity loans. 

If the costs for a remodel or repair aren’t too expensive and you can afford to make more than the minimum monthly payments, charging them to a credit card with a 0% intro rate could also be an option. Be careful, though. If you don’t pay off the balance before the promotional period ends, your interest rate could jump to as much as 21% or higher.

The table below can help you decide which credit method works best for you.

Method	Best for
Home equity loan	Homeowners who want a fixed rate and a longer repayment period
HELOC	Homeowners who like flexibility and are comfortable with a variable rate
Personal loan	Homeowners who don’t want to put their home at risk with a home equity loan or HELOC
Cash-out refinance	Homeowners who want a lump sum to use as they please