How to use home equity to remodel your home
Quick insights
- Homeowners may be able to use their home equity to finance remodeling projects in several ways, such as through a home equity loan or home equity line of credit (HELOC).
- Many mortgage lenders allow qualified borrowers to access up to 80% of their available home equity. This can be a way to fund a range of renovation projects.
- Using home equity for renovations may improve a home’s functionality, comfort and market value, but there are pros, cons and costs to weigh when taking on new debt.
You might love your neighborhood, but your home no longer fits your needs. Perhaps your kitchen looks outdated, or your backyard needs a pool. Instead of moving, you can invest in the home you already own.
If you want to use your home equity to pay for these updates, understanding the benefits, risks and how the process works is important. It would be beneficial to start home improvement work after you secure financing. In general, the property must be in a livable, inspection-ready status. If work has already started, there may be an issue securing a form of financing.
In this article, we’ll look at home equity loans and home equity lines of credit (HELOCs). These are two common tools you may be able to use for your home renovations.
Can you use a home equity loan for home improvements?
Yes, you can use a home equity loan for home improvements. The loan allows you to borrow against the equity in your property and use the money how you decide, such as paying for renovations and remodeling projects.
Home equity loans often have fixed interest rates and terms ranging from 5 to 30 years. Rates depend on your financial profile, such as credit score and income. The amount of equity you can borrow and the loan you qualify for depend on several factors, including your loan-to-value ratio (LTV).
Can you use a HELOC for home improvements?
Yes, a HELOC can be used to remodel or renovate your home. You borrow against your current home equity, but how you access it works similarly to a credit card. The lender provides a line of credit for a set amount, and you can draw from it during a draw period. It often lasts 3-10 years, depending on the lender, offering flexibility that could help you pay for renovation materials or work for years to come.
HELOCs typically have variable interest rates, which means monthly payment amounts can change from one month to the next. The terms and conditions vary and will be set by your lender.
How to use home equity to remodel
Here’s a general process you might follow to use equity for improvements to your home.
1. Price out the project
It’s important to plan the exact renovations you want, such as adding a kitchen island, finishing the basement or building an addition. Then, you can request quotes from contractors and account for the full budget, including materials, labor and permit fees. A clear budget can help determine how much home equity you might need to fund your projects. However, consider waiting to begin any work until you secure a home equity product.
If possible, the home improvements you complete after accessing home equity would add to your home’s value. This way, what you spend is like an investment in your property, helping to rebuild your equity. You also don’t have to borrow more of your equity than you need for a renovation.
2. Calculate your home equity
To calculate home equity, subtract your remaining mortgage balance (the amount you owe) from your home’s current market value (the amount your home could sell for right now).
Let’s say your home is currently worth $400,000, and you still owe $250,000 on your mortgage.
Start by calculating your home equity. Subtract what you owe from the current value of your home:
$400,000 (home value) - $250,000 (mortgage balance) = $150,000 equity
You may have $150,000 in home equity, but lenders have different maximums that you can borrow—usually 80% of your home’s value. That would mean:
$400,000 × 0.80 = $320,000 maximum amount to borrow
To calculate what you can borrow, subtract your remaining mortgage balance:
$320,000 - $250,000 = $70,000 available to borrow
In this scenario, you may be able to borrow up to $70,000. However, various factors affect the amount and terms you’re offered, from the lender’s rules to your financial details. Closing costs may also be due up front.
3. Decide on a way of accessing your equity
The right choice is the option that works for your budget and goals. You may be able to borrow the same amount, but HELOCs and home equity loans work quite differently. HELOCs often have variable interest rates, whereas home equity loans typically have fixed interest rates. These terms are among the factors that can guide your decision.
4. Complete the application process
Before you can use your home equity, you usually have to qualify, apply and close on a loan or HELOC. You can typically compare different lenders’ terms and requirements before applying for a home equity product. Applications usually require details about your home and finances. Then, lenders might require an appraisal to verify your home’s value and available equity. Before you sign, it’s important to understand and plan for this new debt.
Chase does not offer home equity loans.
Pros and cons of using home equity for renovations
Here are several pros and cons of using home equity to finance a renovation project.
Pros
- Lower interest rates: Home equity products often come with lower interest rates compared to other forms of financing, such as credit cards. By comparison, home equity could be a more affordable option for funding home improvements.
- Increased home value: Certain renovations, such as kitchen or bathroom upgrades, may increase your home’s value and potentially deliver a positive return on investment (ROI). This means the value added to your home may help justify the cost of financing the project through a home equity loan or HELOC. Resale value may not be a deciding factor, but it’s a potential benefit nonetheless.
- Flexibility: Loans and lines of credit function differently but may suit home improvements, which can have varying timelines. Repayment terms are also different, which can help you budget for the years ahead, as your project progresses, or after it’s done.
Cons
- Risk of foreclosure: Defaulting on a home equity loan or HELOC often gives the lender a right to foreclose on the home.
- Additional debt: A home equity loan or HELOC will add to your total debt. This can affect your credit score and ability to qualify for additional types of credit, depending on the lender.
- Market fluctuations: The amount of equity you have in a property can fluctuate based on the housing market. That can affect not only the amount you can borrow, but also the amount of value your renovations may add.
- Closing costs: Home equity loans typically involve closing costs, such as title search fees, appraisal fees and loan origination fees. These additional costs can add up and outweigh the financial benefits of using home equity to remodel.
Alternatives to using home equity for home improvements
Home equity isn’t the only way to fund renovations. Several financial options could suit your needs and budget, including:
- Credit cards: Allow you to spend money up to your available limit. When you agree to the terms and conditions of a credit card, one of the more important terms is making the minimum monthly payment.
- Personal loans: Provide lump sums that you can access as needed. Terms can vary but often include a repayment schedule that you could factor into your existing budget. Chase does not offer personal loans.
In summary
Whether using home equity to fund a remodeling project is a good idea depends on a variety of factors. The cost of the project, the value it might add and your budget are important to consider. Borrowing against home equity has its benefits and potential drawbacks, as well.
You can estimate your available home equity, then weigh the pros and cons to help you decide. Understanding the different products and comparing different lenders’ terms can also be useful. The right decision varies by homeowner. At Chase, we offer HELOCs to bring your remodeling plans to life.
