Dreaming of a bathroom upgrade or a backyard patio? Renovations can get expensive fast, and while credit cards or savings are an option, many homeowners forget they already have a powerful financing tool: the equity in their home.
Depending on how long you’ve owned your home or how much you put in for a down payment, there could be value in your property that you can borrow against. And that equity can be a lower-cost way to pay for home upgrades.
But it’s key to know what you’re getting into first. Read on to learn about home equity and how it can fund your home improvements.
Understanding home equity
Equity is the portion of your home you truly own and an asset you can borrow against. It’s the difference between the value of your home and the amount you owe on your mortgage.
So, to figure it out, you take your home’s value and subtract your remaining mortgage amount.
For example, if your property is worth $350,000 and you owe $260,000, you’ve built up $90,000 in equity — about 26% ownership. Each monthly mortgage payment adds to this over time.
Changes in the housing market can affect your home equity as well. A strong market generally increases it, while a declining market can negatively impact your equity.
Weigh the pros and cons of taking out equity
One positive of using equity to fund your home renovations is that you’ll usually pay far lower interest than with personal loans or credit cards.
Another is that if the money goes into improving your property, you may qualify for tax deductions. But note that to do so, you must itemize your deductions rather than claim the standard deduction.
Also, depending on the project, a remodel can increase your property’s resale value.
On the downside, equity‑based borrowing turns your home into collateral. So if you miss payments, foreclosure is a real possibility.
Lenders will also often require that you have a certain amount of equity before you can borrow against it — 20% or so.
Borrowing also eats into your ownership stake, and if your home’s value drops, you could end up owing more than your home is worth. It’s also essential that you account for upfront charges like closing costs, which can run a few percent of the total amount borrowed.
How to access home equity for renovations
Home equity loan: This works like a second mortgage. You get all the money upfront in a fixed lump sum (say $40,000 for a kitchen upgrade) and pay it back over time with predictable, unchanging payments. This is a good option if you’ve mapped out exact project costs.
When you’re ready to borrow, shop around to find the best loans and rates, using a comparison site like this one from Money.com.
Home equity line of credit (HELOC): Think of this as a flexible borrowing pool tied to your home. You might be approved for $60,000 but only use $15,000 at first. During the initial draw period, you can tap funds as needed and just pay interest on what you withdraw. Rates are usually variable, so payments can rise or fall. This flexibility suits ongoing projects with shifting budgets.
Making it work for you
Before touching home equity, calculate whether new payments fit easily into your budget. Only borrow what your project requires, shop lenders for the best rates and fees and consider professional advice if you’re unsure.
The Federal Trade Commission warns that you should always carefully read through documents before closing on your home equity loan or line of credit. Don’t sign anything you don’t agree to or understand.
With the right approach, home equity can be the resource that turns your dream renovation plans into reality.
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