Using Home Equity for Renovations & Home Improvements

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 to increase your home value
• 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:

1. 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. To learn more about this, check out our guide to home equity loans and tax deducting.
2. Interest rates are low. Compared to personal loans, credit cards, and other financial products, home equity loans and HELOCs come with lower interest rates.
3. 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 several million dollars.
4. You can repay it over a long period. Home equity products come with lengthier terms than personal loans—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

Here are a few of the drawbacks 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 significant 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, you could owe 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 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 a second mortgage. You’ll get your loan amount in cash after closing and make a fixed monthly payment until the loan is paid off.

To be eligible, you’ll need a good amount of equity in your property (most lenders will only allow your two loans to equal 85% of your home’s value). You’ll also need a good credit score—often 620 or higher, though this varies by lender.

Pros

• 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.

Cons

• Your rate may be higher than on a HELOC. Longer terms and fixed rates are riskier for lenders, so it may come with higher rates.
• You need a good handle on your costs. You’ll have to estimate your home improvement costs ahead of time to ensure you get the right loan amount.
• You’ll have to apply again if you need more funds. A home equity loan is paid out as a lump sum, so you can’t just draw more money as needed.

Here is a lender offering home equity loans

View Rates

• Rates (APR): As low as 9.50%
• Loan amounts: $20,000 – $500,000
• Repayment terms: 5 – 30 years

Spring EQ is a home equity lender that allows you to keep your first mortgage and still receive the funds you need. Funds can be available in 21 days, on average.

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. It has a draw period during which you can withdraw money as needed. Once that period ends, you enter the repayment phase, 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.

Pros

• You can draw from the loan as needed. This is terrific if you’re unsure 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. HELOC draw periods can last many years, so you can use them for improvements now and down the line.

Cons

• Your payments could fluctuate. HELOCs often come with variable interest rates, which could make budgeting difficult.
• They make it easy to overspend. If you’re not careful, you could draw more money from the HELOC than you need, resulting in more long-term interest costs.

Here is a lender offering HELOCs

View Rates

• Rates (APR): As low as 6.55%
• Loan amounts: $15,000 – $150,000
• Repayment terms: 5, 10, 15, or 30 years

Figure offers a home equity line of credit you can use for home improvements. The application process is 100% online; you can complete it in as little as five minutes. Funds can be available in as few as five days if you’re approved.

To compare other options, check out our guide to the best HELOCs.

Home improvement projects to increase home value

If you want your home improvements to increase your property’s value, you’ll need to choose your remodeling projects carefully.

Here are some of the best projects to take on, according to Remodeling magazine.

• Add a wood deck ($10,355 in resale value)
  • Check out deck financing options
• Remodel your kitchen ($18,206 in resale value for a minor kitchen remodel, $40,127 for a major one)
  • Check out kitchen remodel financing options
• Renovate your bathroom ($13,257 in resale value)
  • Check out bathroom remodel financing options
• Add a master suite ($80,029 in resale value)
• Install 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

Personal loans can be a good option if you need fast funding or your credit score is less than stellar. They also don’t put your home at risk.

On the downside, personal loans can have much higher interest rates than other options. Check out our guide to the best home improvement loans to learn more about using personal loans to improve your property.

Credit cards

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. Ensure you can pay off the card before the introductory rate expires. Rates often jump 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.

>> Read More: Home equity loan and line of credit uses