When using home equity to remodel your home makes sense

Just imagine what you’d do with a large lump sum of cash. Would you upgrade your kitchen, add an in-law suite, or put in a pool? If your house was last updated during the Bush administration and needs upgrades and repairs, a home equity loan could help you make it happen. 

That's because a home equity loan may provide access to the money you need to finance those changes. If you own a home, the equity in your property is a flexible potential funding source—a way to cover the cost of creating the home you want.

Could you use your home equity to remodel your home?

One of the most popular uses of home equity loans is remodeling or renovating. That makes sense, since replacing old appliances or upgrading a kitchen or bathroom could increase the value of your home. Paying for those improvements by borrowing against your equity could 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. 

Using home equity to remodel could offer an additional benefit. When you use the money to buy, build, or substantially improve the property, you’re generally able to deduct the interest paid from your taxable income.

Taking out a home equity loan may be a wise move if you: 

• Want to make improvements that increase the value of your property

• Use it to consolidate high-interest debt, minimizing the amount of interest you pay

• Have a stable income 

• Find a lender that offers a fixed-rate loan, so you never have to worry about your rate changing 

Pro tip: A home equity loan isn’t always the right choice.

A home equity loan isn’t right for everyone. You may not want to take out a home equity loan if:  

• The lender charges a variable interest rate that can increase over time

• Your job situation looks uncertain

• The loan is for discretionary expenses rather than improvements that could increase your home's value

• Home values in your area are dropping, and borrowing against your existing equity could result in you owing more than your home is worth

Other ways homeowners have used their home equity loans

• Pay for children's higher education

• Start or expand a business

• Cover the cost of a special event, like a wedding or 50th-anniversary party

• Pay for healthcare expenses

• Consolidate debt

While each is a fine choice, using the equity in your home to fund home remodeling projects may be one of the best possible options, both in terms of long-term enjoyment and potential return on investment.

What is a home equity loan for home improvements?

A home equity loan for home improvements allows you to borrow against the equity in your home to make updates and repairs designed to increase the value of your property.

Lenders offer different types of home equity loan, but Achieve Loans home equity loan is a fixed-rate home equity line of credit (HELOC). As you do your loan research, you’ll notice how rare a fixed-rate HELOC is.

An Achieve Loans HELOC gives you a five-year draw period. During this time, you can access your credit line as needed, as often as you like, up to your credit limit.

The draw period means you have time to finish one project before moving on to the next. You only pay interest on the amount of money you borrow.

When the draw period ends, you’ll enter repayment and can’t borrow more.

Types of home equity loans for home improvements

When you decide how to pay for home improvements, you 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 research the lowest interest rates and fees. The rate stays the same when you get your loan. Once your loan is finalized, you’ll have a fixed payment schedule until it’s paid off. Most home equity loans come with a fixed interest rate.

When you consider a home equity loan vs. a HELOC, you'll find that a home equity loan  is a great way to cover a large expense immediately but pay for it over time. This may be an excellent option if you know the work you want completed in your home and have already gathered the estimates for each. 

Home equity line of credit: variable rate and use money as you need it 

If you’re unsure 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 could spend a HELOC over time as home improvement costs come up. You only pay interest on the amount you borrow. HELOCs usually come with a variable interest rate.

Using a HELOC for home improvements offers you the flexibility to withdraw the money you need, repay it, and borrow it again during the draw period. 

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 doesn’t change once your loan is final. 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.

It's the best of both worlds: Money available to borrow as needed without worrying about an increase in the interest rate. 

Higher limits open doors

You probably have a clear idea of how you’d like your home to function once it's been remodeled, and you might have an idea of what it could cost. U.S. News says that the average total cost to remodel a kitchen is about $27,000, but a complete overhaul could cost $65,000 to $130,000. 

If you have grand ideas for your home, your project could easily cost six figures. In that case, look for a lender with high loan limits. For example, Achieve Loans offers home equity loans of up to $300,000 to qualified borrowers. As you look at loan rates and fees, make sure the lender you want to work with will lend you enough to complete your project. 

If you're taking out a relatively large loan, another thing to look for is a lender with extended repayment periods. Let's say a lender gives you 15 or 30 years to repay the loan. As long as they don't charge an early payment penalty, a longer-term loan is a good way to keep your monthly payments low. Later, as you can afford it, you could make extra payments or pay the loan off early without fear of additional fees. 

Benefits of using home equity to renovate your home 

There's a good reason home equity loans are so popular: They are an effective way to cover the cost of home renovations. Here are some of the other advantages of a home equity loan: 

• Good use of home equity loan funds. Home renovations are generally considered a wise use of home equity loan funds. In other words, remodeling or renovating your home could increase its value. It could make sense to tie the debt to the home you’re improving. 

• Predictable interest rate. Home equity loans and a select few HELOCs offer fixed-rate interest, meaning you never have to be concerned about an increase in your rate or monthly payment. 

• Interest may be deductible. Taking out a home equity loan for home improvements could lead to tax savings. That's because through 2025, if the home equity loan is secured by your main (or second) home and used to buy, build, or substantially improve the property, interest is classified as home acquisition debt and may be deductible. 

• 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.

• No refinancing. Using the equity in your home doesn't require refinancing your mortgage or giving up your current interest rate. 

• Five-year draw period. If you've ever finished a project only to wish you'd done something differently, a HELOC gives you time to repay a portion of the loan and borrow the money again. That means you have the freedom to make tweaks or add something you forgot. 

• Long repayment terms. With up to 30 years to repay your home equity loan, you could stretch your loan term to keep your monthly pay low. However, the longer your loan term, the more you’ll pay in interest. 

• No in-person appraisal. Some lenders use alternative forms of appraisal, so there's no in-person visit from an appraiser. This is convenient for you as the borrower and one less thing you have to worry about facilitating. 

• 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 could cover with a personal loan, a home equity loan may be a better option.

• 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

No financial product is perfect, including home equity loans. Before borrowing against the equity in your house, be sure to weigh the pros and cons, including these potential disadvantages:

• You might 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 cash flow since you could borrow repeatedly during your draw period.  

• A traditional home equity loan caps the amount you can borrow. A HELOC only caps the credit limit. You can borrow up to your credit limit multiple times 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.

• Home equity loans and HELOCs are mortgages, secured by your home. Because your home acts as collateral, failure to make payments on a home equity loan means risking foreclosure. If you miss payments, your lender has the right to take possession of your property, sell it, and recoup its losses. 

• Home equity loans reduce your equity. Borrowing against the equity in your home means having less equity available if you need it for an emergency or need to sell the property. Having less equity can also lead to owing more on your house than it's worth if home values in your area tank.

• Borrowing costs money. Any time you pay interest over the course of years, it adds up and could cut into your ability to save, invest, or spend in some other way. 

Comparing home equity loan options for remodeling

Which is better, a home equity loan or a HELOC for remodeling? 

Home equity loans and HELOCs share several features. The major difference is that some HELOCs carry a fixed interest rate, offering you the best of both loan types. Another advantage of a HELOC for home improvements is the loan term. If you’re planning a significant home improvement job, it's good to know you have up to 30 years to repay the loan. 

There's no one-size-fits-all loan, but a fixed-rate HELOC may be the best option if:

• A fixed interest rate is important to you

• You want to draw money when necessary and make payments on the amount you've borrowed

• You don’t know the total project cost, and you want the option to borrow, repay, and reborrow money as needed 

15- or 30-year HELOC, which is better?

Whether a 15- or 30-year HELOC is better depends on your financial situation. If you're paying for daycare for young children, for example, you may not have the extra money you'll have once the kids are in school. In that case, a 30-year HELOC may be your best bet.

On the other hand, if you're looking to pay off the loan before you retire, a 15-year HELOC may be a better fit. Not only will it be paid off faster, but you could also save money on interest. The following scenario illustrates what we mean.

Mike and Karen plan to remodel the house they inherited from Karen's grandmother. According to their contractors, their wish list should cost around $200,000. They put pencil to paper to determine the loan term that would best fit their situation. Here's what they discovered:

This table is for informational purposes only. Interest rate and payments are for illustrative purposes only. Individual results vary. This example uses the Actual 360 interest calculation method.  

Mike and Karen had to decide whether they wanted more cash flow now or more savings in the long run. They could save $393 monthly by opting for a longer-term loan. Or they could save $246,254 in total interest by opting for a 15-year loan. Naturally, there were pros and cons associated with each scenario. 

Ultimately, they went with a 15-year HELOC because their inherited home had no mortgage. However, the couple agreed that a 30-year loan might have been a better fit if they were also paying a mortgage, especially if there was no early payoff penalty. 

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 you borrowed against. So if you borrowed to remodel, you might qualify. To take this deduction or any deduction, you have to itemize.