Whether you’ve just moved into a new house or you’re spiffing up a long-term place, home improvement projects are not cheap.
The average kitchen remodel, for example, cost $25,656 in 2022, according to home improvement guru Bob Vila. Other parts of the home (like a bathroom or garage) cost about half that, but these expenses can add up — particularly if you’re remodeling an entire house. That’s a lot more than you want to put on a credit card.
Many homeowners overcome this challenge with a loan to cover remodeling costs and improve their home’s value — but how do you know whether a home equity loan or a home improvement personal loan is better for your situation? We’re here to help.
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Home improvement projects often require significant upfront costs that many homeowners don’t have readily available Taking out a loan is one way to finance renovations, repairs, or upgrades to your home If you have equity built up in your property, a home equity loan or line of credit can provide an affordable financing option for your next home improvement project.
What Are Home Improvement Loans With Equity?
Home improvement loans with equity allow homeowners to leverage the equity they have accumulated in their home to access financing. There are two main types of home equity loans:
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Home Equity Loans: These provide you with a lump sum of cash upfront that you can use for any purpose. The loan amount, repayment terms, and interest rate are all fixed.
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Home Equity Lines of Credit (HELOCs): These give you revolving access to funds up to a set limit. You can draw money as needed and only pay interest on what you use. HELOCs often have variable rates that can fluctuate over time.
In both cases, your home acts as collateral for the loan. The lender places a lien on your property, giving them the right to foreclose if you fail to repay.
To qualify, you’ll need sufficient equity, good credit, and the ability to manage an additional monthly payment Interest rates are typically lower than other financing options since your home secures the debt
Benefits of Using Home Equity for Home Improvements
Utilizing the equity in your home through a loan or line of credit offers many advantages for funding renovations and upgrades
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Lower Rates: Home equity loans and HELOCs usually have lower interest rates compared to alternatives like personal loans or credit cards. This can save you significantly on interest charges over the life of the loan.
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Tax Benefits: You may be able to deduct the interest on home equity loans on your taxes if the funds are used to substantially improve your home. Always consult a tax professional to understand how tax rules apply to your situation.
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Pay Only What You Use: With a HELOC, you only pay interest on the amount you borrow. This flexibility can help keep costs down.
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Consolidate Higher Rate Debt: If you have outstanding credit card or personal loan balances, you may be able to roll them into a home equity loan or HELOC at a lower rate.
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Build Home Equity: Making renovations that increase your home’s value can allow you to build additional equity beyond just paying down the loan principal.
How Much Can You Borrow?
The amount of home equity you currently have determines how much financing you can access. Lenders will assess your equity based on:
Home Value – Mortgage Debt – Any Other Liens = Available Equity
From there, most lenders will let you borrow up to 80-90% of your available equity. Those with higher credit scores can sometimes qualify for up to 95%.
For example:
- Home Value: $300,000
- Existing Mortgage Debt: $180,000
- Available Equity: $120,000
- Maximum Home Equity Loan @ 90% LTV: $108,000
Run the numbers on your specific situation to estimate the maximum you can borrow against your equity.
What Are the Requirements?
While home equity loans offer flexible financing, you still need to meet certain criteria:
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Credit Score: Minimum scores vary by lender but often start around 620. Scores of 700+ typically qualify for the lowest rates.
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Equity: You’ll need at least 15-20% equity before lenders will approve a home equity loan or HELOC.
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Debt-to-Income Ratio: Lenders want to see your total monthly debt payments including the new loan payment take up no more than 43% of your gross monthly income.
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Home Value: There are no minimum home values, but most lenders require an appraisal to confirm the value and determine the amount they will lend.
Always check individual lender requirements, as they can vary. Meeting these thresholds helps ensure your approval and affordable loan terms.
What Are the Costs?
When budgeting for a home improvement project, account for both the costs of the renovations themselves as well as fees associated with a home equity loan:
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Interest charges – The rates on home equity loans and HELOCs are generally lower than other financing options, but interest expenses still make up a significant portion of your total costs.
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Closing costs – You’ll pay various fees at closing including application fees, appraisal fees, and title fees. These can range from 2-5% of the total loan amount.
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Early repayment penalties – Home equity loans sometimes charge prepayment penalties if you pay off the balance quicker than the set repayment terms.
Always compare total costs across multiple lenders to find the most affordable financing option for your situation.
How to Apply
Ready to move forward with a home improvement project using home equity? Follow these steps:
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Check your equity – Determine your current home value and calculate your available equity based on your remaining mortgage balance.
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Pick loan type – Decide whether a fixed home equity loan or flexible HELOC works better for your needs.
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Compare lenders – Research multiple lenders and compare interest rates, fees, loan amounts, and eligibility.
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Submit your application – Once you select a lender, complete the application providing information on your income, debts, credit, and home value.
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Get an appraisal – The lender will order an appraisal to confirm your home value and finalize the loan-to-value ratio.
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Close on the loan – After approval, you’ll sign final paperwork and the lender will disburse the loan funds.
Follow these steps to secure funding for your next home renovation using the equity you’ve already built.
How Soon Can You Access the Money?
One advantage of home equity loans is that you can often access funds relatively quickly compared to other options:
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1 week: Pre-approvals if you have your financial documentation ready.
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2-4 weeks: Full approval and loan closing once the application is complete.
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Same day: Some lenders can provide funds the same day for smaller loan amounts.
This faster financing means you can move ahead with urgent repairs or time-sensitive remodeling projects without delay.
5 Smart Ways to Use Home Equity Loans for Improvements
Home equity loans give you wide flexibility since you receive funds upfront in a lump sum. Here are 5 savvy ways to utilize the cash from a home equity loan:
1. Kitchen Remodel
Kitchen overhauls are one of the best home improvement projects for boosting resale value. The high upfront costs make financing with a home equity loan a smart move.
2. Bathroom Upgrade
Like kitchens, updated bathrooms can greatly improve your home’s appeal and value for potential buyers. Access home equity to finance these expensive upgrades.
3. Roof Replacement
A roof replacement often costs $10,000-$30,000 depending on materials and size. A home equity loan provides affordable financing for this critical home repair.
4. Deck or Patio Addition
Adding outdoor living space like a deck or patio can cost $10,000 or more. Use equity financing to make this renovation more budget-friendly.
5. Swimming Pool Installation
In-ground pools cost $25,000 on average and require significant upfront payment. A home equity loan offers a way to fund a pool without draining your savings.
Pros and Cons of Home Equity Loans
Home equity loans offer many benefits, but also have some potential drawbacks to consider:
Pros
- Access large amounts of cash for home renovations
- Interest rates lower than most alternatives
- Pay back the funds over an extended repayment term
- Potential tax deductions on the interest paid
Cons
- Monthly loan payments added to your existing housing costs
- Closing costs and fees reduce the net loan amount
- Your home is at risk if you default on the loan
- Misuse of funds could lead to financial trouble
Look at your entire financial picture to decide if the pros outweigh the cons for your situation.
Alternatives to Home Equity Loans
Other options beyond home equity loans can also help fund home improvements. Compare the pros and cons of each:
Personal Loans
Pros: Approved based on credit, no home required. Fast access to funds.
Cons: Higher rates, large loans often require good credit.
Credit Cards
Pros: Quick access, rewards opportunities. Manageable for smaller projects.
Cons: Much higher interest rates, no extended repayment terms.
Cash-out Refinance
Pros: Interest rates similar to home equity loan. Consolidate into single mortgage.
Cons: Costs similar to purchase mortgage. Rates not ideal if you have a low rate currently.
HELOC
Pros: Pay interest only on what you borrow.
What’s the difference between a home equity loan and a home improvement personal loan?
Isn’t a loan… a loan? At its most basic, yes. But some nuances distinguish these two types of loan options.
When a home equity loan makes more sense
Home equity loans can be a good option for home improvements that will require between $25,000 and $60,000, as lenders typically won’t give you much more than that for an unsecured personal loan. If you’ve paid off a good amount of your mortgage and have excellent credit, however, you may be able to get a home equity loan for a larger amount of money.
In addition, secured loans tend to come with lower interest rates, and home equity loans typically hold a longer loan term than personal loans—translating to lower monthly payments. If you have significant equity in your home as well as the time and patience to wait for your application to be approved and the money delivered, a home equity loan may be a less expensive option over the life of the loan.
If you’re a member of a credit union, that may be a good place to start, as they may be able to offer you lower interest rates than a larger bank. You may also be able to save money and simplify your personal finances by using a home equity loan for debt consolidation, where you can combine multiple loans into a single monthly payment.
As with any loan, it’s always worth shopping around to compare your options — and in this case, it might be worth comparing not only within, but also across, loan types.
When you’re on the hunt for a loan to spruce up your space, home equity and home improvement loans aren’t the only options. Here are some alternatives.
Should You Use Your HELOC for Home Improvements?
Does a home improvement loan make sense?
A home improvement loan makes sense if you don’t have enough equity in your home or don’t want to use it as collateral. Equity is your home’s value minus what you owe. If you have equity, you could get a lower monthly payment on a home equity loan or line of credit.
How do I finance a home improvement loan?
The best way to finance home improvements depends on factors such as your home equity, how much money you need to borrow and your credit score. Compare home improvement loans with home equity loans, home equity lines of credit, cash-out refinancing and federal programs. What are home improvement loan rates?
Are there different types of home improvement loans?
There are five different types of home improvement loans: personal, cash-out refinance, home equity, home equity line of credit (HELOC) and FHA rehab loans. All of these loans can help you fund various home improvements and upgrades in different ways.
Can a home equity loan be used for home improvements?
Home equity loans can be used for a variety of purposes, including home improvements, but only if you have a certain amount of equity in your home. To qualify for a home equity loan, you’ll have to meet certain equity, credit score, and debt-to-income (DTI) ratio requirements.