The Benefits of Using a Home Equity Loan for Home Improvements

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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Is your home currently worth more than you owe, and are you considering tapping into the equity to fund improvements? A home equity loan or home equity line of credit (HELOC) could be a viable option to pay for a renovation.

You should first understand how they work and the key benefits these loan products offer. It’s equally important to know about other funding options that may be a better fit to fund your home improvements. 

How to Use Equity To Finance Home Improvements

Home equity loans and home equity lines of credit (HELOCs) are debt products many homeowners use to fund home renovations. 

Home Renovation Loans

Learn how the RenoFi ReFi cash-out refinance home renovation loan allows you access up to 80% of your home’s projected value after renovation.

How to Use a Home Equity Loan for Home Improvement

Home equity loans allow you to borrow between 80 and 90 percent of your home’s current value minus what you still owe on the mortgage. To illustrate, if your home is worth $425,000 and you owe $315,000 on your mortgage, you could be eligible for a home equity loan up to $67,500.

When you apply for a home equity loan, the lender will review your income, credit score, mortgage balance, and your home’s market value to determine the maximum amount you can borrow. 

Home equity loans act as a second mortgage and come with a fixed interest rate. Loan proceeds are disbursed as a lump sum and payable in equal monthly installments over a term of five to 20 years. Be mindful that these loans are secured, so failure to make timely payments could put your home at risk for foreclosure. 

How to Use a Home Equity Line of Credit HELOC

If you’re approved for a HELOC, you’ll have access to a line of credit. The amount you’re eligible for is also determined by the equity in your home, and HELOCs also act as a second mortgage.

You’re free to withdraw as much cash as you need (up to the limit) during the draw period, usually between five and ten 10 years. You will also be responsible for interest-only payments during this window. When the draw period ends, you can no longer access funds, and you will begin making principal and interest payments for a period of 10 to 20 years. 

Home Equity Loans vs. HELOCs: The Difference

Although home equity loans and HELOCs are similar, there are a few distinct differences between the two. Home equity loans give you all the cash at once that you pay back over time. But a HELOC gives you access to a revolving line of credit, and you only have to pay back what you borrow. Also, home equity loans have fixed interest rates, making monthly payments more predictable. By contrast, the rates with HELOCs are generally variable. 

The Benefits of Using a Home Equity Loan for Home Improvement Projects 

Home equity loans offer several benefits to homeowners looking to fund home improvement projects.

Potential Increase in Home Value

With the right improvements, you can potentially increase the value of your home. Consult with a knowledgeable real estate professional to inquire about your renovation’s potential impact on your home’s value. 

Competitive Interest Rates

Credit cards and personal loans are often accompanied by higher interest rates than you’d find with home equity loans. Consequently, they’re not recommended to fund home improvements as you could spend several hundred or even thousands of dollars more in interest.

Fixed Monthly Payment

You will enjoy a fixed monthly payment that can easily be worked into your monthly budget. The interest rate is also fixed, so you won’t have to worry about changes to your monthly payment over the loan term.

Extended Repayment Period 

Unlike personal loans that generally offer repayment terms of three to five years, you could get up to 20 years to repay your home equity loan. Credit cards also give you an extended period to pay. You only have to make a small minimum payment each month, but dragging out repayment could cost you a fortune in interest. 

Tax Benefits

The interest paid on a home equity loan could get you a tax break if you itemize deductions. Consult with a tax preparer to learn more about how this itemized deduction works and if it’s available to you. 

Lower Closing Costs

You could use a cash-out refinance to pay for home improvements. However, the closing costs and fees on these loan products are sometimes higher than what you’ll be charged for a home equity loan.

Home Renovation Loans

Learn how the RenoFi ReFi cash-out refinance home renovation loan allows you access up to 80% of your home’s projected value after renovation.

How to Get a Home Equity Loan or HELOC for a Remodel

A home equity loan or HELOC may seem ideal to pay for renovations. Unfortunately, you may not meet the requirements for either product if you have limited equity built up in your home. In fact, if your home value hasn’t appreciated as expected over time or you’ve only been in your home for a short period, your application for funding could be denied. And if you are eligible for funding, it may be for an amount that’s not nearly enough to cover your proposed expenses.

Are you having trouble getting approved for a home equity loan or HELOC? Or maybe you want to increase your borrowing power? Consider a better alternative, like a RenoFi Renovation Home Equity Loan to get access to the capital you need. 

RenoFi partners with credit unions to offer home equity loans that allow you to borrow up to 90 percent of your home’s after-renovation value. There are no inspections or draws, and you’re not required to refinance your property to access funds. 

Loan amounts from $20,000 to $500,000 are available, and you’ll receive a fixed interest rate and a loan term of up to 20 years. Even better, you can use RenoFi to fund improvements on a home you currently own or plan to buy. 

Referring back to the example above, if you owe $315,000 on a home that’s worth $415,000, you’re capped at $67,500 with a home equity loan or HELOC. But suppose renovations are projected to increase your home value by $60,000 to $475,000. In that case, you could get up to $112,500 with a RenoFi Home Equity Loan. 

Use the RenoFi loan calculator to determine if you may be eligible for funding. You can also schedule a call, email a team member or use the online chat feature to explore loan options that may be available to you.

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All data provided by the Home Mortgage Disclosure Act, at cfpb.gov updated Dec, 19
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