If you own your home, you may not realize you can borrow against the equity value to fund home renovations. Adding a new gourmet kitchen or expanding your living space may be within reach when you take out a home equity loan. If you have dreamed of refreshing your living space, find out how to do this with a home equity loan for remodeling projects.
Can You Get a Home Equity Loan for Remodeling?
If you own your home, you may be able to tap into your home’s equity for remodeling projects. Your home’s equity is the difference between what your house is worth and what you owe on your mortgage. If you have built up sufficient equity in your home, you may be able to take out a home equity loan to pay for home renovations.
How Does a Home Equity Loan Work for Home Improvements?
Home equity loans are commonly referred to as second mortgages. These installment loans are secured by your home and based on the equity you have built.
Your home’s equity generally rises as you pay down your mortgage. To illustrate, if you bought your home for $350,000 and owe $200,000 on your mortgage, your home equity is $150,000.
Changes in the housing market may also affect the equity in your home. As your home’s value rises, your home’s equity increases. Similarly, a drop in your home value lowers the equity you have built in your home.
Using the above example, if the market value of your home drops to $250,000 and you owe $200,000, the equity in your home falls to $50,000.
How Much Can You Borrow With a Home Equity Loan?
Lenders typically look at your home’s loan-to-value (LTV) ratio to determine the equity in your home. An LTV ratio compares what you owe as a percentage of the asset’s value. The higher the ratio, the more you owe.
Assuming you owe $200,000 on a home worth $350,000, your LTV is $200,000 / $350,000 = 57.14%. If you owe $200,000 on a home worth $250,000, your LTV becomes 80% ($200,000 / $250,000).
Lenders usually won’t extend financing beyond 80% of your home’s LTV. You typically need more than 20% equity to take out a home equity loan.
To illustrate, an 80% LTV on a home worth $350,000 is $280,000. If you currently owe $200,000, the maximum you’d likely be able to borrow under a home equity loan is $80,000 ($280,000 - $200,000).
Pros and Cons of Using Home Equity Loan for Remodels
Using a home equity loan to finance your remodeling project has some key benefits, but some drawbacks to consider.
Pros
- Deduct interest: The interest you pay may be tax-deductible if you itemize deductions on your personal return.
- Lower interest rates: You can typically get a lower interest rate than if you took out a personal loan or used a credit card to make purchases.
- Use for different purchases: You aren’t limited to how you can use home equity loan funds. Whether you improve your home or pay down debt, you decide how to spend the money.
Cons
- Risk: A home equity loan uses your home as collateral. You could lose your home if you cannot repay what you owe. Be sure you can afford the additional monthly payment before you take out a home equity loan.
- Closing costs: You may incur closing costs when taking out a home equity loan.
- Higher interest: You pay interest on the entire amount you borrow. If you use the money incrementally, you still owe interest on the total loan amount.
How to Get a Home Equity Loan for Home Improvements
Getting a home equity loan for home improvements can take a few weeks or even months. You can save time and possibly improve your chances of approval when you better understand the process lenders go through.
- Calculate your home equity: Check your LTV to determine whether you qualify for a home equity loan.
- Meet eligibility requirements: Your home is used as collateral when you take out an equity loan. However, lenders may have other qualifications you must meet to borrow money. While eligibility varies, lenders often consider your credit score and overall debt-to-income ratio before loaning money.
- Shop for a lender: While you might be inclined to stick with the same lender you used for your original mortgage, it’s worth shopping around to see whether you can get better terms and rates with someone else.
- Complete application: Once you have selected a lender and verified you meet their eligibility requirements, you will apply for a home equity loan. The lender will likely ask about your financial situation, income and debt.
- Approval process: The lender may ask for more documents or information as your application progresses.
- Receive funds: Once your home equity loan is approved, you receive the funds.
Compare the Best Home Equity Loan Lenders for Renovations from Benzinga’s Top Providers
You can tap into the equity built up in your home to finance renovations in your house. Below are some of the best lenders for home equity loans based on lending options, loan-to-value ratios, loan-to-value requirements and other qualifications.
- Best For:Online MortgagesVIEW PROS & CONS:securely through Rocket Mortgage's website
- Best For:Flexible Mortgage OptionsVIEW PROS & CONS:securely through Angel Oak Mortgage Solutions's website
- Best For:Self-employed BorrowersVIEW PROS & CONS:securely through CrossCountry Mortgage's website
Available in: CA, CO, CT, DC, FL, GA, IL, MD, MA, MI, NH, NJ, NY, NC, OH, PA, RI, SC, TN, TX, VA, WA
Other Options for Using Equity for Renovations
Beyond home equity loans, there are other financing options to consider for home remodeling projects.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) works like a credit card where you only borrow what you need. Unlike a home equity loan, you only pay interest on the money you take out with a HELOC. Interest rates for most HELOCs are adjustable, which means your monthly payments change as rates rise and fall.
Cash-Out Refinancing
A cash-out refinance lets you take out the equity in your home as a lump sum. You replace your existing mortgage with a new one that includes both what you owe on your home and the equity you have taken out. So, you only have one monthly payment to make. You might save money with cash-out refinancing if you land a lower interest rate than what you currently pay on your existing mortgage.
Personal Loans
A personal loan is an unsecured loan you pay back over time. You can use the money borrowed for any purpose, including home renovations. You don’t have to put your house up as collateral to secure the loan. When loaning you money, lenders consider factors like your credit score and debt-to-income ratio. Getting a personal loan may be easier with good credit, but you’ll likely pay higher interest rates and have a shorter repayment term than with a home equity loan.
A Home Equity Loan Turns Your Home Remodel Project Into Reality
Your home’s equity can open the door to making your home life more enjoyable. With a home equity loan, you can often get a better rate than other forms of financing. You might even get a tax break along the way. Leverage the equity you have built up in your home to make your home renovations happen.
Frequently Asked Questions
Does a home equity loan have to be used for home improvements?
No — you can use the money from a home equity loan for any purpose.
Should you take a home equity loan to remodel?
A home equity loan may be one of the least expensive ways to get money to remodel your home. If you have enough equity and can take on the additional monthly payment, a home equity loan may be a good fit for your remodeling project.
How much equity do you need to get a loan to remodel your home?
Most lenders require a minimum of 20% equity to get a home equity loan.