When you’re ready to make home improvements, you may be able to tap into the equity you’ve build in your home to fund your new kitchen, bathroom or much-needed fix. A home equity loan or home equity line of credit (HELOC) is a common way to pay for updates when your assets are tied up in your property.
A home equity loan is sometimes called a second mortgage. And like a mortgage, you may be required to pay between 2% and 5% of the amount you borrow in closing costs when tapping into your equity for a remodel.
These types of equity loans come with a fixed interest rate and repayment schedule, so you’ll have the same monthly payments for the life of the loan. But your rate will most likely be higher than what you could get at an adjustable rate. Lender requirements vary, though you can expect to need at least 15% equity in your home to be approved.
While many home equity lenders advertise waiving application and origination fees, you’ll likely still need to pay third-party fees, such as those for title insurance.
Funding can take anywhere from two to six weeks, and you get the money as a lump sum to use at your discretion.
A HELOC is a revolving line of credit that’s similar to a credit card. You’re approved for a set line of credit that can be up to 80% of your home’s equity, and you borrow against that amount as much as you need during a draw period of five to 10 years, depending on the loan.
During the draw period, you make interest-only payments on the amount you draw. But a HELOC comes with a variable interest rate, causing your payments to fluctuate as interest rates rise and fall with the market.
When the draw period ends, your HELOC payments are amortized to include principal and to ensure you can pay off the entirety of what you borrowed within the repayment period, which is typically 20 years.
| Home equity loan | HELOC | |
|---|---|---|
| Interest rate | Variable rate | Fixed rate |
| Fees and costs | Annual fee of $50 to $75 | Closing costs of 2% to 5% of amount borrowed |
| Turnaround | 2 to 6 weeks | 2 to 6 weeks |
| Access to funds | Lump sum payment | Draw on your credit line as needed |
| Repayment | Fixed payments | Interest-only payments through draw period |
| What it’s best for | Projects with a set amount | Projects that need more flexible financing |
You may be able to write off the interest on your HELOC or home equity loan — as long as it meets two key rules:
Home improvements must be more substantial than paint or wallpaper to qualify for the deduction, though cosmetic changes that are part of a larger remodel may still qualify. The IRS qualifies substantial improvements as those that:
Some home improvements can be written off in full. For example, you can qualify for the Renewable Energy Tax Credit for installing energy-efficient equipment like solar panels. And if you spend more than 7.5% of your adjusted gross income on improvements to your home for medical reasons, such as those for disability access, you may be able to take a tax deduction on your remodel expenses.
Talk with a tax professional who understands your personal financial details to understand the write-offs and credits you can qualify for.
You must meet lender eligibility requirements to access your home’s equity, though you’re better positioned to qualify if you meet four key criteria:
Yes, though the amount of debt that’s acceptable to a lender depends on the your income. Lenders typically look for a DTI that’s under 50%, though 43% is the standard. That means that your combined debt should only be 43% of your income. If you already have a personal loan or another type of installment credit, you could have trouble getting approved — the inflexible payments can affect your ability to stay current on your new loan.
When you’re using your hard-earned home equity to fund a renovation project, you want to get as much out of it as possible. Some home improvements add more value to your home than others, according to the Journal of Light Construction’s Cost vs. Value report. Here are national averages to use as a guide when planning your home updates.
High-value renovations enable you to recoup 70% or more of your investment by increasing the resale value of your home. Mid-value projects allow you to recoup 50% to 69% of your investment.
| Project | Investment | Value increase | Percent of costs recouped |
|---|---|---|---|
| Replace your garage door | $4,041 | $3,769 | 93.3% |
| Add decorative stone veneer to your home | $11,066 | $10,109 | 91.4% |
| Mid-range kitchen remodel | $28,279 | $20,125 | 71.2% |
| Replace existing siding with fiber cement | $22,093 | $15,090 | 68.3% |
| Replace windows with vinyl | $20,482 | $13,822 | 67.5% |
| Add a wooden deck | $19,248 | $12,464 | 64.8% |
| Replace your roof with asphalt shingles | $31,535 | $18,780 | 59.6% |
| Mid-range bathroom remodel | $27,164 | $15,990 | 58.9% |
| Add a mid-range master suite | $175,473 | $93,762 | 53.4% |
| Add a mid-range bathroom | $63,986 | $33,160 | 51.8% |
The biggest advantage of DIY renovations is saving money. If there are jobs you can do yourself, why waste money hiring a contractor to do them? As long as you’ve got enough time to invest in the project, doing the job yourself is a win-win, as you have complete control over the scheduling and completion of the project. We’ve listed some of the jobs you should DIY below:
There are some jobs that, if done badly, could cause serious and expensive damage to your home. This could not only be a substantial setback for your renovation project but could also affect your home’s value. And if you make a mistake while performing major electrical work, for example, the consequences could be fatal.
If any job requires a special permit or license, that’s usually a good sign that it’s beyond the reach of a DIYer.
For other ways of funding your next home remodel using your home equity, look to two options:
Other ways to borrow include:
Using your home equity to improve your home — and in doing so, increase your home’s equity — can be a great strategy. But you’re putting your home up as collateral. So make sure you use the right option for your project, and that the new payment is well within your budget.
Weighing your options is vital to avoid ending up in worse financial shape than you were before you tapped into your home equity. Here’s how.
Compare home equity loans and HELOCs to pay off your debt.
There are special laws you need to know if you plan on getting a HELOC or home equity loan in Texas.
What to know about HELOC rates in Florida to get the best rate.
What to know about a Truist HELOC — before you apply.
Do you have to pay closing costs on home equity loans and HELOCs?
Here are questions you should prepare for when getting preapproved for a home equity loan.
Together, these 7 HELOC lenders cater to a diverse range of borrowers.
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