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, put in a pool? A home equity loan may provide access to the money you need to finance your dream. If you own a home, the equity in your property represents 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 your home. 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. 

Plus, when you use the money to buy, build, or substantially improve the property, you may be able to deduct the interest paid from your taxable income. Other life goals a HELOC could help you tackle

Homeowners have used their home equity loans to:

• 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 return on investment

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 shop around for the lowest interest rates and fees. The rate does not change when you get your loan. Once your loan is finalized, you’ll have a fixed payment schedule until it’s paid off. That could 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 could 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 could 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 does not change when 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.

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.  HomeAdvisor reports that kitchen remodels typically range from $14,600 to $41,500, although they can cost much more. Among homeowners who remodeled their kitchens in 2023, the average out-of-pocket amount was $27,000. 

If you have grand ideas for your home, your project could easily cost six figures. In that case, it makes sense to 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 loan shop, 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 in full without fear of additional fees.

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. 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. 

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. 

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.

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 cash flow since you could make withdrawals as needed to complete your project. 

Another disadvantage of a traditional home equity loan is that it caps the amount you could 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 could 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

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.