Home equity loans put cash in your hands that you can use for virtually any purpose. Using a home equity loan to renovate could make sense if you’re making improvements that are likely to increase your property’s value.
Getting a home equity loan or home equity line of credit (HELOC) for home improvements offers some advantages over other types of loans, but you’ll need to have sufficient equity to borrow. A good credit score can also make a difference if you hope to qualify for a low interest rate.
How does a home equity loan or HELOC work for home improvements? Here’s what you should know.
Key Points
• Access to large cash amounts is a significant benefit of using a home equity loan for home renovations.
• The loan-to-value ratio is an important consideration for lenders.
• Interest on a home equity loan may be tax-deductible if used for home improvements, but this benefit may change.
• To obtain a home equity loan, borrowers must calculate equity, compare rates, get preapproved, and finalize the loan process.
• Compared to other funding options, home equity loans typically offer lower interest rates and higher borrowing limits, though collateral and closing costs are involved.
Understanding Home Equity Loans
To understand how does a home equity loan work for home improvements, you first need to understand equity. So, what is home equity? In simple terms, it’s the difference between what you owe on your mortgage and your home’s value. A home equity loan allows you to take some of that value out in cash, pulling equity out of your home with your home used as collateral.
A home equity loan is a type of second mortgage, also called a junior lien. This means that in order of repayment, your first mortgage (which is the home loan you used to purchase the property) takes precedence. Should you end up in foreclosure and your home is auctioned off, the proceeds would pay off the first mortgage and anything left would go to the second.
There are different types of home equity loans and credit line arrangements:
• Fixed-rate home equity loan. A fixed-rate home equity loan offers a lump sum of money that you pay back at a fixed or set interest rate.
• Fixed-rate HELOC. A home equity line of credit or HELOC is a revolving line of credit you can borrow against as needed. Fixed-rate HELOCs are less common, but some lenders offer them.
• Variable-rate HELOC. A variable-rate HELOC has an interest rate that’s tied to an index or benchmark rate. If the benchmark rate rises or falls, your HELOC rate moves in tandem.
Having a home equity loan or HELOC means you’ll have two mortgage payments to make each month. If you’re considering a home equity loan to renovate, it’s important to understand what you’ll pay to make sure it’s a good fit for your budget. A home equity loan calculator can help you crunch the numbers.
Benefits of Using a Home Equity Loan for Home Improvements
Using a home equity loan or HELOC for home improvements offers some unique benefits. For one thing, it may allow you to access a large amount of cash. Considering that the average cost to remodel a home can run anywhere from $20,000 to $90,000, that’s a plus. Here are some other good reasons to consider a home equity loan for home renovation.
Lower Interest Rates
Home equity loans can offer lower interest rates than unsecured loans for qualified borrowers. The higher your credit score is, the lower your rate is likely to be.
A fixed rate is another advantage because it offers predictability. Your payments stay the same and you can easily estimate how much you’ll pay in interest. For example, if you get a $100,000 home equity loan at 7.75% with a 30-year term, you’ll always pay $716 a month. (A HELOC is more likely to have a variable interest rate — one that rises or falls at regular intervals in response to market rates.)
Home equity loan rates tend to be higher than purchase loan rates since there’s more risk for the lender. However, they can still be cheaper than personal loans or unsecured home improvement loans.
Potential Tax Deduction
The IRS offers a tax deduction when you use a home equity loan or HELOC to “buy, build, or substantially improve the residence” that secures the loan.
You can claim this deduction in addition to any mortgage interest you deduct for your primary home loan if you itemize on your return. You’ll just need to be sure that you’re only using your equity loan or HELOC to cover eligible expenses related to your renovations. (Save your receipts as part of your tax records.) You’ll want to talk to your tax advisor about this, especially given that, as of early 2025, the current tax rules for deducting home equity loan interest are set to sunset at the end of 2025.
Increased Home Value
Using a home equity loan to remodel could help boost your home’s value, depending on the projects you decide to tackle. That could leave you with more profit in your pocket if you eventually decide to sell the home, or more equity to borrow against later.
Here are some of the home improvement projects offering the highest return on investment:
• Garage door replacement
• Entry door replacement
• Midrange kitchen remodel
• Deck addition
• Vinyl siding replacement
• Window replacement
• Roof replacement
• Bathroom remodel
When deciding which projects to fund, consider the ROI as well as the projected time to complete them. Upgrading to your dream kitchen, for instance, could take months, so you have to be patient enough to see the renovations through.
Evaluating Your Home’s Equity
One of the most important factors lenders consider is the amount of equity you have in your home. Specifically, they look at your loan-to-value (LTV) ratio. If you don’t have sufficient equity in the home, you may not qualify for a home equity loan or HELOC.
Impact on Borrowing Capacity
What is loan-to-value ratio? It’s a ratio that measures the amount you want to finance against the value of your property. Here’s how to calculate it.
Typically lenders look for a maximum LTV ratio of 80% to 90% for home equity loans and HELOCs.
How much home equity can you borrow? Let’s say you owe $300,000 on your home and it’s valued at $500,000. Your LTV would be 60%. In terms of how much of your $200,000 equity you could borrow, you might be able to withdraw up to $100,000 with a home equity loan if a lender allowed a max LTV of 80%, or $150,000 if the lender allowed a max LTV of 90%.
Steps to Obtain a Home Equity Loan for Renovation
How do you get a home equity loan for remodeling? It’s a multi-step process but for the most part, it isn’t that different from getting a mortgage to buy a home. Here’s an overview of how it typically works.
• Calculate your home equity, then calculate your loan-to-value ratio.
• Shop around to compare mortgage rates for home equity loans and HELOCs. Consider getting quotes from several lenders to see how they measure up.
• Consider getting preapproved. Preapproval means that you’re conditionally approved for a home equity loan.
• Select a lender and finalize your application. Most home equity lenders allow you to apply online and upload your documents digitally.
• Wait for the lender to schedule an appraisal. Your lender may request an in-person appraisal, offer a desk appraisal, or use a hybrid approach that combines an in-person visit with use of an automated valuation model.
• Review the loan terms. Assuming you’re approved, you’ll have a chance to review your loan terms before signing off on the final paperwork.
• Close and sign the documents. You’ll pay any closing costs that are due, sign the loan agreement, and tell the lender where to send the loan proceeds.
The process to get a home equity loan or HELOC can take a few weeks to a few months, depending on your situation and choice of lender.
Alternatives to Home Equity Loans for Renovation
A home equity loan for remodeling is just one way to fund home improvements. If you’re looking for other options, you’ve got choices.
• Personal loan. The main difference between home equity loans vs. personal loans is that one is secured by your home; the other isn’t. Personal loans can offer generous lending limits, and you can use the money for anything, but interest rates may be higher. And instead of closing costs, you might pay application or origination fees to borrow.
• Personal line of credit. A personal line of credit is a revolving credit line that you can draw against as needed. A line of credit might be a good fit if you don’t know exactly how much money you’ll need for renovations. The upside is that you only pay interest on the part of your credit line that you use, whereas a home equity loan requires you to pay interest on the entire loan amount.
• Credit card. A credit card could be a good fit to fund home improvements if you have a low interest rate and earn rewards on your purchases. For example, you might use a card that rewards you with 5% cash back at home improvement stores. Just keep in mind that the interest you pay to a credit card (or personal loan) for home remodeling isn’t tax-deductible.
The Takeaway
Using a home equity loan or HELOC to remodel could be an attractive option if you’re ready for a home makeover but don’t want to pull from your reserves. Checking your credit scores before you can apply can give you an idea of what you might qualify for, as far as rates go. From there, the next step is checking mortgage rates and terms from different lenders to see who has the best offer.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
Are there risks associated with using a home equity loan for renovations?
There are risks to using a home equity loan for renovations. If you end up in a situation where you can’t make your home equity loan or mortgage payments, you could end up in foreclosure. That would allow your lenders to take the home from you, since it secures both of your mortgages.
Can I use a home equity loan for any type of home improvement?
You can use a home equity loan for home improvements big and small, whether that means a full kitchen remodel, adding on an extension, or simply replacing some of your fixtures and appliances. Home equity loans offer flexibility since you can use the money for virtually any expenses.
What are the typical interest rates for home equity loans?
Interest rates for home equity loans are typically a percentage point or two higher than rates for first mortgages. So if a lender is charging 6.50% on average for purchase loans, it might charge 7.50% to 8.50% for a home equity loan or HELOC. A good credit score can help you qualify for the lowest rate possible on a home equity loan.
How long does it take to get approved for a home equity loan?
Home equity loan approval may take a few weeks since the lender will need to review your credit and income, and schedule an appraisal to determine the home’s value. The entire underwriting process could take a few months if you hit any snags. For example, if you’re self-employed, you may need to provide additional documentation of your income or assets to the lender.
Are there closing costs associated with home equity loans?
Home equity loans can have closing costs just like other mortgages. Typical closing costs for a home equity loan range from 2% to 5% of the loan amount. Some lenders may allow you to roll the closing costs into your loan so you pay nothing upfront; however, that does add to the amount you’ll pay interest on.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/andresr
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