Many homeowners take pride in their homes and want to make the space their own. Home improvements can enhance your living space, increase your property’s value, and address essential repairs.
However, these projects often come with significant costs, prompting many homeowners to explore different financing options.
One of the most popular methods is using equity for home improvements, allowing homeowners to tap into the value built up in their property to fund renovations.
In this article, we’ll cover everything you need to know about using equity for home improvements, including how it works, its benefits, and the steps to get started.
What is home equity?
Your home equity is basically the part of your home that you fully own. It’s the difference between how much your home is worth and how much you still owe on your mortgage.
As you pay off your mortgage and your home goes up in value, your ownership of the home (your equity) increases.
This equity can be used as a guarantee for getting a loan, which can be helpful when you want to make improvements to your home.
How using home equity works
When you use equity to finance home improvements, you borrow against the value you’ve built in your home.
The most common method is a home equity line of credit (HELOC), which allows you to borrow as needed up to a set limit over a specified period. It operates as a revolving line of credit, and you only pay interest on the amount borrowed during the initial draw period.
HELOCs are particularly beneficial for home improvements because they offer flexibility. Costs can vary, and many projects are completed in phases, making the ability to draw funds as needed ideal.
Why use equity for home improvements?
There are several advantages to using equity for home improvements compared to other financing options.
- Lower interest rates: HELOCs have lower interest rates because they are secured by your home, making them more affordable, especially for large projects.
- Flexible access to funds: A HELOC provides flexibility to borrow as needed, making it perfect for projects completed over time. You can draw funds as your project progresses and only pay interest on what you use.
- Potential tax benefits: If the funds from your HELOC are used for home improvements, the interest may be tax-deductible under IRS guidelines. Talk to a tax professional to find out how this could affect your individual situation.
- Increase home value: Home improvements financed through equity can significantly boost your property’s value, depending on what you do.
Types of home improvements ideal for using equity
Certain home improvements offer higher returns on investment, making them ideal for maximizing home equity.
Kitchen remodels
A kitchen renovation is one of the most popular and highest-return-on-investment (ROI) home improvement projects, usually around 70%. A HELOC can finance everything from new countertops to updated appliances and work with the project’s timeline.
Bathroom upgrades
Modernizing bathrooms with new fixtures, plumbing, and energy-efficient features can increase your home’s value while improving its functionality. HELOCs provide the flexibility to complete these projects in stages, as additional costs or delays often arise with these projects.
Room additions
Adding living space, whether an extra bedroom or home office, requires significant funds. Using equity provides the needed cash flow and allows you to borrow throughout the long construction process.
Energy-efficient upgrades
Installing energy-efficient windows or insulation not only reduces utility bills but also adds value to your home. A HELOC can help cover these upfront costs, which may also qualify for tax incentives or rebates.
How to use equity for home improvements responsibly
While using equity for home improvements offers many benefits, it’s important to approach it wisely. Here are some tips for managing your HELOC responsibly:
Stick to your budget
Before applying for a HELOC, create a detailed budget for your renovation project. Borrow only what’s necessary and avoid overspending on non-essential upgrades.
Understand repayment terms
During the HELOC’s draw period, you may only need to pay interest, but once the draw period ends, you’ll start repaying both the principal and interest.
Have a clear repayment plan in place to avoid financial strain.
Borrow only for improvements
While it’s tempting to use your equity for other expenses, it’s safer to use it solely for home improvements that will increase your home’s value. It’s not wise to go out of budget and use the funds just because they’re available.
Shop for the best rates
Compare HELOC rates and fees from lenders to secure the best deal and save money in the long term.
Steps to access your home equity for improvements
If you’re ready to use your home equity for renovations, follow these steps:
- Evaluate your equity: Calculate how much equity you have. Most lenders require you to keep at least 15-20% equity in your home after borrowing.
- Check your credit score: Aim for a higher credit score—typically 600-620 or higher—to improve your chances of getting better HELOC terms.
- Gather documentation: Gather proof of income, mortgage details, and a home appraisal to verify your home’s value.
- Choose a lender: Research and compare offers from different lenders to find the best terms for your HELOC. HomeEQ, for example, can get your funding in as little as 10 days.
- Submit your application: Once you’ve selected a lender, complete the application process, which may involve an appraisal to determine your home’s current value. HomeEQ offers a fully digital, streamlined application process.
- Access your funds: After approval, you can draw from your HELOC as needed to fund your home improvement project.
Using equity for home improvements—Wrap up
Using equity for home improvements is a smart way to finance renovations, offering lower interest rates and flexible repayment terms.
Whether you’re planning a major remodel or upgrading essential systems, a HELOC can provide the funds needed without overwhelming your budget.
By using your equity responsibly, you can enhance your home’s comfort and value for years to come.
Take the next step with HomeEQ
At HomeEQ, we specialize in helping homeowners unlock their home equity with flexible financing options tailored to your needs.
Whether you’re considering a major renovation or smaller upgrades, our expert team can help by offering competitive rates and personalized support.
Use HomeEQ’s super-fast and easy digital application to explore how you can use your home’s equity to invest in your future.
Get approval in as little as 15 minutes and receive your funding in days.