Using Home Equity For Home Improvement Loans



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2020 has been a big year for home equity. The average homeowner with a mortgage has seen his or her equity rise to over $ 200,000 thanks to a sharp increase in home prices, according to the Owner’s Equity Perspectives Housing data company CoreLogic report.

At the same time, many Americans working from home have realized a need to reconfigure their space, says Dr. Frank Nothaft, chief economist at CoreLogic.

Tapping into home equity “has enabled many families to finance renovations and expansions of their homes to meet these needs,” says Nothaft.

As more and more people realize that working from home could stay even after the pandemic, “they think ‘do I want to build this? Do I want to finish the basement or create an office? Says Craig Lemoine, director of the Academy for Home Equity in Financial Planning at the University of Illinois. “I think some of the borrowings are that.”

If you’re considering tapping into your home’s equity for a remodeling or redevelopment project, here’s what you need to know.

Home equity options for home renovations

In general, there are three main ways to access equity in your home: a cash refinance, a HELOC, or a home equity loan.

Refinancing of collection

Every homeowner should consider a cash refinance first. A cash refinance replaces your original mortgage with one that’s worth more than what you owe on your home, and you’ll be paid cash for the difference.

Cash refinance rates are favorable right now, so you may be able to secure the funds you need to improve your home and save on mortgage interest. Keep in mind that with a cash refinance, you will be resetting your mortgage terms and having to pay out-of-pocket costs such as closing costs, appraisals, and set-up costs.

If you haven’t refinanced at some point in the past year, rising mortgage rates could potentially lessen the appeal of this option. In that case, you might want to consider a home equity loan or HELOC, which have long been back-up options for homeowners.

Home equity loan

A home equity loan works like a traditional loan. You will receive a lump sum payment at the start of your loan term, then monthly payments until you pay off what you borrow (plus interest).

Home equity loans have a fixed interest rate, which means you’ll lock in your interest rate up front and it won’t change. This can be beneficial in a low interest rate environment, such as now.


A home equity line of credit, on the other hand, works more like a credit card. This is a revolving line of credit secured by your home, which you can access by check, debit card or other means depending on your lender.

HELOCs have a variable interest rate, which means that the interest you must fluctuate over the course of your HELOC term and is subject to change with the market. HELOCs traditionally operate on a 30-year model, with a 10-year drawdown period and a 20-year payback period.

During the drawdown period, you can spend up to the amount of your line of credit (determined when applying), then you have the entire repayment period to pay back what you spend (plus interest. ).

What you need to know about these options

Before considering any type of loan that uses your home as collateral, it is important to understand that you could lose your home if you fail to repay it. HELOCs and home equity loans – just like a new mortgage after refinancing – are secured by your home, so non-repayment could mean foreclosure by the lender.

With home equity loans and HELOCs in particular, you’ll need good home equity and good credit to access it.

A HELOC can be a good choice if you have ongoing costs or aren’t sure exactly how much you’re going to spend on your home improvement project. But if you’re worried about rising interest rates, a home equity loan may make more sense for you.

Home equity loans for home improvement: pros and cons

The inconvenients

  • Must take and reimburse the full lump sum, even if your project ends up costing less

  • Fixed interest can be bad in a high interest rate environment

  • Secured by your home

HELOCs for home improvement: advantages and disadvantages


  • Spend as you go

  • Can spend on anything

How to get the most out of your home equity or HELOC loan

With a home equity loan, what you see is what you get.

You will get the full amount borrowed up front and then it’s up to you to spend it as you see fit. A HELOC is a little more varied. You will be able to use your HELOC funds up to the amount of your line of credit until the end of your drawdown period (usually 10 years).

All the while, you’ll need to make sure you make your loan repayments on time and in full to avoid any damage to your credit, or you risk losing your home.

Alternative home improvement options

While there are certainly other ways to finance home improvements, many homeowners will be able to obtain larger financing by tapping into their home equity. This is because your home is probably one of your most important assets.

In addition to a cash refinance, home equity loan, or HELOC, here are a few other options you might consider and what you need to know before doing so:

Personal loan

A personal home renovation loan is one option, but it’s one of the worst ways to pay for home renovations. High interest rates, short repayment periods, and lower loan amounts all contribute to personal loans not being ideal for home renovations.


If you have the ability to pay cash for your project up front, you will be able to avoid financing costs and the accumulation of debt. Just be careful where you get that money from. Don’t use up your emergency fund or waste all your other cash savings on a project.

Credit card

Credit cards may seem like an option to help pay off part of a project, but keep in mind that credit cards have very high interest rates compared to other types of loans. It may be a good idea to pay for some of your renovations this way, especially if you find a credit card with a long introductory period of 0% APR. Just make sure you have a plan to fully reimburse your costs during this introductory period, or your persistent balance will be hit with a higher APR at the end of this introductory period.

Also beware of spending close to your credit limit on any credit card, 0% introductory period or not. High credit usage can hurt your credit score. Most experts recommend spending only 30% of your credit limit each month to keep your score up.

Pension saving

Most experts agree that you should never touch your retirement savings, except in an emergency. Tapping into your retirement to finance a real estate project not only robs your retirement fund of money, it costs you in lost interest as well. This money could benefit from compound interest, so be very careful when withdrawing money from your retirement accounts and avoid doing so if you can.



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