How To Use a Home Equity Loan for a Home Remodel

Home equity loans allows you to draw on the equity of your home to take out a loan. It is possible to utilize the money you earn from the home equity loan to finance a renovation of your home. It is possible to invest in repairs to your home, make improvements or to enhance worth of the house. But, there is many different aspects to consider prior to applying for an equity loan for your home to fund improvements.

Key Takeaways

  • Home equity loans are typically fixed, which means that you are aware of the amount you’ll have to pay each month.
  • It is possible to receive a tax-free deduction for interest when you get a loan to make improvements to your house.
  • Certain home remodeling projects, like kitchen remodels will likely increase price of your house.


How Remodeling With a Home Equity Loan Works

An Home equity loan will be secured through your property. That is, your home is used in the capacity of the collateral to secure the loan. If you’re looking to take out an equity loan for your home it is important to locate the best rate and lender that you are able to. Your credit score and the value of your home will impact the rate of interest and the amount you are able to borrow.

Shop for a Lender

The first step is to choose a lender to finance the home equity loan which is also called an secondary mortgage. It is possible to consider the one who holds the first mortgage, also known as the primary mortgage, on your home. You may also want to consult with family members or friends for suggestions.

When looking at the lenders, pay focus on the conditions that apply to the loans, which include rates for the per-year percentage rates

(APR) every lender provides and any penalties for prepayments it may impose when you pay off the loan in advance.

Check Your Credit

Before deciding on a lender, you should check the credit reports and your credit score. This will help you identify problems or mistakes that could affect your credit score.

Perhaps the credit card transaction is reported the credit reports of yours as due late when in reality it was made in time. In general late payments and other negative information remain the credit reports for a period of seven to seven years. 1 If the credit bureau finds that the payment was inaccurately reported as being late, the payment should be removed from your credit file. 2 Removal of the late payment may improve your credit score, which could result in higher loan rates.

Fill Out an Application

Once you’ve picked an appropriate lender and inspected your credit score, you’re now ready to apply for an equity loan to your home. Today, a lot of lenders permit you to submit an online application.

In the process of completing the application and are asked to provide information about your home as well as your income, expenses, as well as other financial information that helps lenders determine whether or not to accept your application. You’ll have to provide lenders with documentation like W-2 forms pay stubs and a copy of your ID photo, and proof of insurance for your home.

To be eligible to get a loan for your home equity you’ll typically require:

  • Credit score that is in line with the requirements of the lender. The more impressive your credit score greater, the greater chance to get lower interest rates.
  • A minimum of 20 percent capital in the home. This is calculated using what’s known as the ratio of loan-to-value home equity. It’s the amount that your house is worth less the amount you owe on your principal loan. 
  • The ratio of your percentage of your income to debt of less than 43%. the number is calculated through combining all of your monthly debt repayments and then dividing the result by your monthly gross earnings. 
  • Your ability to repay loan installments 

The lender may also require an appraisal of the property as well as an the interior inspection of your house prior to approving your loan.

If your request is accepted and you are able to close the loan the lender will generally provide you with an amount of money in one lump that they will require to pay back over a specific time.


How Do You Repay a Home Equity Loan?

The length for a mortgage generally is between five and 30 years. Therefore, if you’re able to get a loan of 30-years then you’ve got the duration of 30 years for paying it back. The loan’s APR as well as monthly payments are generally fixed.

Remember that if you’re not able to pay your monthly payments and you’re not able to make them, you could lose your home. Since the loan was secured with your house, the loan lender could take possession on your house and take over the property should you fail to pay the loan.


Pros and Cons of Using a Home Equity Loan for a Remodel


  • Fixed rate and payment
  • Cash in advance
  • Potentially higher value of homes
  • Tax deductions that could be possible


  • A higher interest rate
  • Costs of closing
  • Homeowners may lose their home
  • Potential decline in home value

Pros Explained

    • Fixed rates and paymentGenerally the APR and monthly installments for the mortgage on equity are set, meaning they will not change during the loan term. This is a secure way to fund an upgrade to your home rather as opposed to using a credit line or line of credit since you know the amount you’ll need to pay back every month.
    • Money for the initial payment: When you get a home equity loan you get all of the loaned funds in one lump amount. This means that you will be able to pay for your home renovation costs in one go and pay off the loan over the course of time.
  • Potentially increased the value of your home Based on the kind of home improvement project your house could increase.
  • Tax deductions are possible: When you use the funds from an equity loan to finance an improvement project in your home it is possible to deduct the amount of interest you have to pay for the loan. This could to offset the costs of the renovation. 6

Cons Explained

  • A higher interest: The APR of an equity home loan could be higher than that for the line of credit (HELOC). So, you may pay more to fund your home’s remodeling.
  • Costs of closing: You likely will have to pay for closing costs, and you might be required to pay additional costs too. In the majority of cases closing costs are equal to between 2% and 5 percent of the loan amount. The additional costs could increase the costs of home renovation. 7
  • Potential loss of your the home: If you don’t make the payments due to an equity loan for your home the lender could close on your home and then take it over. If that happens, your home renovation project would not be worth the effort.
  • A possible decline in your home’s worth: Over time home value home could decrease, which could result in you having to pay more for your second and first mortgages than your home is worth. In this scenario the home renovation project that is financed by the home equity loan will most likely not bring a return on the investment.


Should You Use a Home Equity Loan To Remodel?

There isn’t a clear solution when it comes to deciding whether or not you should take advantage of a home equity loan in your home renovation project. But, there are certain aspects that could aid you in making your decision.

When You Should Use a Home Equity Loan to Remodel

This is when it may be logical to make use of the home equity loan to fund an upgrade project:

  • The project of remodeling increases its value to your house when you embark an overhaul of your kitchen such as a kitchen remodel it could increase the value of your home more than an addition to the bathroom would.
  • Home equity loans shouldn’t create financial stress If you’re able to manage the monthly payments in the first place, then an equity loan from your home could be a great option to finance an upgrade to your home.
  • Home equity loans could be an economical method of financing in the event that the total cost of the project is lower than, for instance credit cards, the home equity loan may be more beneficial. If you calculate the interest you’ll pay for the loan as opposed to credit cards and the total will be less in the case of a loan, then you may consider keeping that debit card on your account.

When You Should Not Use a Home Equity Loan to Remodel

This is a time when it may not be appropriate to utilize the home equity loan for an upgrade project:

  • Home equity loans can place you in a financial position and could lead to the loss of your home A home renovation project is worth the effort when you don’t have a home to reside in.
  • The project of remodeling would bring little or no value to your house Certain renovations offer more of a return over other renovations. For example, a bathroom remodel is one example. It will likely yield less return than an addition to your deck could.
  • The project can be funded using money saved in an account for savings Then it’s best to avoid the use of the loan to finance your home equity when you have already got the cash. You don’t have to worry about missed payments in the near future, and you’ll be able to avoid paying interest.


Home Equity Loan vs. HELOC to Remodel

You may prefer an unsecured line of credit than an one-time loan. If so you may find that the home equity line of credit (HELOC) could be the best option for your requirements as opposed to the credit card for home equity.


Lump cash sum Cash withdrawals are available when required
Fixed rate of interest Variable rate of interest
A higher rates of interest than HELOC A lower interest rate than a home equity loans
Fixed monthly payment Variable monthly payment



Home equity loans provides the ability to access money in one lump sum which can be more convenient than taking cash out when needed to finance a remodeling project. However it is true that an HELOC could make it simpler to fund multiple home renovation projects over a lengthy period.


Interest Rate

The interest rate of the home equity loan usually fixed, whereas rates for an HELOC typically fluctuates. 8 So the fixed rate could give you more assurance when financing your home renovation project however, you may end having a lower HELOC interest rate later on.


Monthly Payment

While you’re planning the costs of a home renovation The knowledge that the monthly finance payment is not variable could make it simpler to plan your budget.


the authorAaron Krause

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