Using Home Equity for Renovations & Home Improvements
Home equity loans and home equity lines of credit can be smart ways to cover the costs of home improvements. The right choice depends on how predictable your costs are and the type of payment for which you’re looking.
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Paying down your mortgage helps you build equity in your home—equity you can tap via a home equity loan or home equity line of credit (HELOC). These loans can be smart ways to pay for home improvements and repairs, which help increase your home’s value (and your equity stake) even further.
Not sure if a home equity loan or HELOC is the right move for your home improvement project? This guide will cover when to use them—and which one to choose.
In this guide:
- Benefits of using home equity for renovations
- Downsides of using home equity for remodeling
- Deciding between a home equity loan and HELOC for home improvements
- Home improvement projects that increase the value of your home
- Alternative financing options for home improvements
Benefits of using home equity for renovations and home improvements
Home equity products offer significant benefits, especially when used toward improving your property.
Here are just a few of the advantages you enjoy with a home equity loan or HELOC when compared with other options:
- The interest you pay may be tax deductible. As long as you use your HELOC or home equity loan to increase the value of your home, you can write off the loan’s interest on your annual tax returns.
- Interest rates are low. Compared to personal loans, credit cards, and other financial products, home equity loans and HELOCs come with lower interest rates.
- Loan limits are high. While the specific amount you can take out will depend on how much equity you have, some HELOCs and home equity loans go as high as a couple of million dollars.
- You can repay it over a long period of time. Home equity products come with lengthier terms than personal loans—typically from five to 30 years.
One of the biggest benefits of using your equity toward home improvements is that it increases the value of your house. That means more in profits if you sell later on.
Downsides of using home equity for remodeling and home improvements
As with anything, there are also some disadvantages to tapping your home equity.
Here are a few of the drawbacks you’ll want to consider before taking out a home equity loan or HELOC:
- It puts your home at risk. Your property is the collateral on a home equity product, so if you fail to make your payments, the lender could seize your home.
- It may take longer than other options. Home equity loans and HELOCs require a lot of documentation and have longer funding periods than credit cards and personal loans.
- You may need to cover closing costs. Just like with your first loan, you might have closing costs and fees to pay come closing day.
You could also go upside down on your mortgage. If the market changes and your home value decreases, it could mean owing more on your loans than your house is worth.
Deciding between a home equity loan and HELOC for home improvements
The main difference between a HELOC and home equity loan is that one pays you a lump sum (home equity loan) and the other allows you to draw from as needed, like a credit card (HELOCs). Home equity loans are also fixed interest rate products, while HELOCs typically come with both variable- and fixed-rate options.
The right choice really depends on how you’re using the loan, how much you’ll need, and when you need it.
Using a home equity loan
A home equity loan is basically a second mortgage. You’ll get your loan amount in cash after closing, and you’ll make a fixed monthly payment until the loan is paid off.
To be eligible, you’ll need to have a good amount of equity in your property (most lenders will only allow your two loans to equal a combined 85% of your home’s value). You’ll also need a good credit score—usually 620 or higher, though this varies by lender.
- Your interest rate and payment are fixed. This makes it easy to budget and plan for payments.
- You’ll get all the money you need at once. If you need to buy materials, put down deposits, or pay contractors, you’ll have the funds you need as soon as your loan closes.
- Your rate may be higher than on a HELOC. Longer terms and fixed rates are riskier for lenders, and thus usually come with higher rates.
- You need a good handle on what your costs will be. You’ll have to estimate your home improvement costs ahead of time to make sure you get the right loan amount.
- You’ll have to apply again if you need more funds. Since a home equity loan is paid out as a lump sum, you can’t just draw more money as needed.
Here is a highly-rated lender offering home equity loans
As low as 5.205%
$20,000 – $500,000
5 – 30 years
Spring EQ is a home equity lender that allows you to keep your 1st mortgage and still receive the funds you need. Funds can be made available in as little as 11 days to get your home improvement off and running.
- Minimum credit score: 680
- Maximum loan-to-value: 90%
- Maximum debt-to-income: 50%
To compare other options, check out our guide to the best home equity loans.
Using a HELOC
A HELOC functions more like a credit card. There’s a draw period during which you can withdraw money as needed, and once that period ends, you enter the repayment phase. This is when you start paying back the funds to the lender.
Eligibility requirements vary by lender, but according to data from Equifax, HELOC borrowers tend to have higher credit scores than those who take out home equity loans. HELOCs also come with closing costs, just as your mortgage did.
- You can draw from the loan as needed. This is great if you’re not sure how much your home improvements will cost or you think you may have more expenses down the line.
- There may be interest-only payment options. This can be helpful if you need a low payment upfront.
- You can use it for years to come. HELOC draw periods typically last many years, meaning you can use them for improvements now and down the line.
- Your payments could fluctuate. HELOCs often come with variable interest rates, which could make budgeting for them difficult.
- They make it easy to overspend. If you’re not careful, you could end up drawing more money from the HELOC than needed, resulting in more long-term interest costs.
Here is a highly-rated lender offering HELOCs
4.99% – 13.25%
$15,000 – $150,000
5, 10, 15, or 30 years
Figure offers a home equity line of credit that can be used for home improvements. The application process is 100% online and can be completed in as little as 5 minutes. If approved, funds can be made available in as few as 5 days.
- Minimum credit score: 640
- Maximum loan-to-value: 80%
If you want to compare other options, you can check out our guide to the best HELOCs.
Home improvement projects that drastically increase the value of your home
If you want your home improvements to actually increase your property’s value, then you’ll need to choose your remodeling projects carefully.
Here are some of the best projects to take on, according to Remodeling magazine.
- Adding a wood deck ($10,355 in resale value)
- Remodeling your kitchen ($18,206 in resale value for a minor kitchen remodel, $40,127 for a major one)
- Renovating your bathroom ($13,257 in resale value)
- Adding a master suite ($80,029 in resale value)
- Installing stone veneer siding ($8,943 in resale value)
Alternative financing options for home improvements
Home equity loans and HELOCs are just a few of the options you have for covering your home improvement costs. In some situations, personal loans or credit cards may be a better fit.
Personal loans can be a good option if you need fast funding and your credit score isn’t great. They also don’t put your home at risk.
On the downside, personal loans typically have much higher interest rates than other options. To compare options, check out our guide to the best home improvement loans to learn more about using personal loans to improve your property.
Credit cards are also an option if you need quick access to cash. These also come with much higher interest rates, so look for a card with a 0% introductory period. Make sure you can pay off the card before the introductory rate expires, as rates often jump significantly once the intro period ends.
If you need a new card, check out our picks for the best credit cards.
The bottom line
If you’re doing home renovation projects, tapping your equity may be a smart way to cover the expenses. Make sure you consider the risks, weigh all your options, and shop around for your lender. Rates and terms vary from one lender to the next, so comparison shopping can save you big.
Recap of home equity loan options
Author: Aly Yale