When using home equity to remodel your home makes sense
Key Takeaways:
A home equity loan or home equity line of credit (HELOC) lets you borrow against your home’s equity.
A home equity line of credit gives you more flexibility to decide when and how much to borrow.
Home equity borrowing can save you a lot of money in interest and fees compared to using credit cards.
It’s so nice to have a home that you truly enjoy living in. It’s also nice to have options that can help you afford to fix it up just the way you want. The equity you have in your home could help you cover the cost of a remodeling project. You can go from dreaming about that new deck to relaxing on it with the people you love.
Can you use your home equity to remodel your home?
One of the most popular uses of home equity loans is to pay for remodeling or renovating your home. That makes sense, since replacing old appliances or upgrading a kitchen or bathroom can increase the value of your home. Paying for those improvements by borrowing against your equity can be a win-win. You get to enjoy your new space and, at the same time, increase the value of your home should you decide to sell it down the road.
Types of home equity loans for home improvements
When you’re deciding how to pay for home improvements, you’ll have a few choices.
Home equity loan: fixed interest rate and one-time draw
A traditional home equity loan lets you borrow a lump sum against the equity you have in your house. If you know how much you need to borrow, then you can shop around for the lowest interest rates and fees. The rate is locked when you get your loan. Once your loan is finalized, you’ll have a fixed payment schedule until it is paid off. That can be a great way to cover a large expense right away but pay for it over time.
Home equity line of credit: variable rate and use money as you need it
If you’re not sure how long a remodeling project will take or how much it'll cost, a home equity line of credit (HELOC) might be a better option. Instead of borrowing the full amount all at once, you can spend a HELOC over time as home improvement costs come up. You only pay interest on the amount you borrow. If you pay your bills over weeks or months, you can pay less in interest by borrowing only the amount you need.
Fixed-rate HELOC: fixed interest rate and use money as you need it
Although it’s hard to find, there's a fixed-rate HELOC option that combines the most attractive features of home equity loans and traditional HELOCs. You get a fixed interest rate that's locked in when your loan is approved. Then you get a draw period during which you can borrow, repay, and borrow more, up to your credit limit, as often as you like. When the draw period ends, you’ll repay the loan on a fixed payment schedule.
Benefits of using home equity to renovate your home
Good use of home equity loan funds: Home renovations are generally considered a wise use of home equity loan funds. Remodeling or renovating your home could increase its value. It can make sense to tie the debt to the home you’re improving.
Save money: A home equity loan may save you money compared to other options. That’s because a home equity loan is a secured loan. With a secured loan, you’re borrowing against an asset, which lowers the risk for the lender. A home equity loan may cost less compared to other financing options.
Bigger loan: Home equity loans usually allow a higher loan amount than other kinds of loans. If your remodel will cost more than what you can cover with a personal loan, a home equity loan may be a better option.
Affordable payment: A longer repayment period brings the monthly payment down. A comfortable monthly payment could make tackling that large project a realistic goal.
Tax benefit: When you borrow against a home and use the money to buy, build, or substantially improve it, you might be able to deduct the interest from your taxable income.
Keep other credit lines open: Using a home equity loan for your remodeling project allows you to keep your other credit, like credit cards, open for other financial needs.
Disadvantages of using a home equity loan for remodeling
The main disadvantage of a traditional home equity loan is that you have to take the funds all at once, upfront, even if you don’t need all the money yet. Also, you can’t change your mind later about how much you want to borrow.
A HELOC, on the other hand, gives you more control over the flow of money.
Another disadvantage of a traditional home equity loan is that it caps the amount you can borrow. A HELOC only caps the credit limit.
You could borrow more than your credit limit with a HELOC because you’re making payments during the draw period. You can bring your balance down and borrow more before your draw period ends, even if you withdrew the maximum earlier on. You can’t do this with a home equity loan.
Comparing home equity loan options for remodeling
What to compare | Home equity loan | HELOC | Fixed-rate HELOC |
How do you get the money? | Lump sum | As you need it | As you need it |
Is there a draw period? | No | Yes | Yes |
Are there fixed payments? | Yes | After draw period | After draw period |
Is the interest rate fixed or variable? | Fixed | Variable | Fixed |
Has a balloon payment? | No | Sometimes | No |
Typical repayment period | 5–20 years | 5–30 years | 10–15 years |
Is your home equity loan tax deductible?
Just like on a mortgage, the interest on your home equity loan might be tax deductible. To qualify for the deduction, you have to use the money to buy, build, or substantially improve the home that you borrowed against. So if you borrowed to remodel, you might qualify. To take this deduction or any deduction, you have to itemize.
It’s a good idea to talk to a tax professional to find out how the IRS rules might apply to you.
Frequently asked questions
How do I take equity out of my home for renovations?
Your home equity is your home’s value minus the amount you owe, if anything, on your mortgage. If you owe less than 85% of your home’s value, you can apply for a home equity loan or HELOC for renovations. There are other requirements, such as a minimum credit score and a limit on how much other debt you can have. An Achieve mortgage advisor can walk you through the options.
Is a Home Equity Line of Credit (HELOC) a good idea right now?
If you're a homeowner needing funds, a Home Equity Line of Credit (HELOC) with a fixed interest rate can be a great option. With a fixed rate, your interest rate will stay the same throughout the loan's life, making it easier to budget your monthly payments. A HELOC can be a flexible and convenient way to access cash for home improvements, debt consolidation, or other expenses.
Does a home equity loan have to be used for home improvements?
No. Homeowners can use a home equity loan or HELOC for nearly any expense, like buying or repairing a car, paying tuition, or paying off more expensive debt such as credit cards or student loans.
Can I get a Home Equity Line of Credit (HELOC) with a fixed rate?
Yes, although most HELOCs have a variable interest rate, some lenders offer HELOCs with a fixed-rate option. The interest rate won't change over the life of the loan, which can give you peace of mind and simplify budgeting your monthly payments.
What’s better, a home equity loan or a HELOC?
A fixed-rate HELOC offers the best of both worlds. Since you only pay interest on the amount of your line of credit that you actually use, you can reduce the amount of interest you pay over time by only borrowing what you need. And with a fixed interest rate, you don’t have to worry about your costs fluctuating after your loan is finalized.
