Are you considering upgrading your kitchen, adding a new deck, or tackling a bathroom remodel? Using home equity for home improvements could be the key to making those changes a reality.
Home equity is an option worth considering for homeowners with built-up equity. It allows you to fund renovations and increase your property’s value.
But before diving in, homeowners need to understand how home equity works and how to use it wisely.
In this article, we’ll look at how you can use home equity for home improvement, help you navigate your options, and make informed decisions to enhance your home without risking your financial future.
Understanding home equity
Home equity is the amount of your home that you truly own.
Equity is the difference between your home’s worth and the amount you still owe on the mortgage loan you took out to buy it.
For example, if your home is valued at $422,600, the median price for a resale home as of July 2024, and you owe $250,000, you have $172,600 in equity.
Several factors affect how equity builds over time:
- Home appreciation: As property values rise, so does your equity, even without extra mortgage payments.
- Mortgage payments: Each payment towards the principal increases your equity.
- Home improvements: Certain renovations can boost your home’s market value, further adding to your equity.
You can access this equity through cash-out refinancing or home equity loans, which can be useful financing options for home improvement projects.
Why consider home equity for your home improvements
Using home equity for home improvements offers several advantages:
- Lower interest rates: Home equity loans generally come with lower interest rates than other popular options, like personal loans and credit cards, so they can be a more budget-friendly way to finance significant home improvement projects.
- Potential tax benefits: If the funds are used for home renovations, the interest on home equity loans or lines of credit could be tax-deductible. Be sure to consult a tax advisor for detailed guidance.
- Increase in home value: Strategic upgrades, such as kitchen renovations or new windows, can enhance your home’s value, improving its market appeal when you decide to sell.
Risks of using home equity
- Increased debt: A home equity loan or cash-out refinance increases your overall debt, requiring higher monthly payments.
- Risk of foreclosure: Since your home is used as collateral, failing to make payments could result in losing your property.
How to use home equity for home improvements
Home equity loans can unlock funding for various home improvements that enhance your property’s value and your own enjoyment.
Here are some impactful home improvement projects you might consider financing with your home equity.
Landscaping
Improving your home’s curb appeal through landscaping can significantly increase market value—by up to 28%.
Use your equity to install a new garden, add a flower bed, or revamp your entire yard. These projects enhance not only the aesthetic appeal but also the overall desirability of your home.
Installing an outdoor kitchen
For those looking to add a functional and luxurious touch to their outdoor space, an outdoor kitchen could be the perfect project.
Options range from simple grill islands to elaborate setups with stone ovens and sophisticated dining areas.
Outdoor kitchens continue to grow in popularity and can provide an excellent return on investment by extending your living space into the great outdoors.
New windows
Replacing old windows with inefficient seals or insulation with new, energy-efficient ones can significantly reduce your home’s energy costs by up to 30% in heat loss and gain.
Not only does this improve comfort by eliminating drafts, but it also enhances your home’s energy efficiency and can yield a high return on investment, with some estimates placing it at 67.5%.
These projects, funded through a home equity loan, can transform your living environment while potentially increasing your property’s value substantially.
Types of home equity loans
Cash-out refinancing and home equity loans are the two main options for utilizing home equity for home improvements.
Understanding what makes these two loan types different can help you zero-in on your best option.
Cash-out refinancing
With a cash-out refinance, you take out a new, larger mortgage, and the extra money you get can be used for things like home improvements.
If the interest rates improve on what you’re currently paying, this might also lower your overall mortgage rate.
Pros:
- Lower interest rates than other loan types
- Potential tax benefits if funds are used for improvements
- Can reduce your mortgage rate if rates have fallen
Cons:
- Resets your mortgage term
- Closing costs can be significant
Home equity loan
Frequently called a second mortgage, a home equity loan enables homeowners to secure a lump sum loan against their equity, with fixed monthly payments over a set term.
This is ideal if you have a specific project and want predictable payments.
Pros:
- Fixed interest rates provide stability
- Keeps your primary mortgage intact
Cons:
- You’ll manage two separate loans
- Missing payments could result in foreclosure
Considerations before taking out a home equity loan
It’s important to evaluate your financial situation carefully before deciding to use home equity for home improvements.
Consider the following:
- Credit score: The higher a borrower’s credit score, the lower the interest rates—and better terms—they can secure on a home equity loan.
- Debt-to-income ratio: Lenders assess this to determine your ability to take on more debt. Keeping it low improves your chances of approval.
- Loan costs: Account for additional costs such as closing costs and appraisal fees. These can add to the overall cost of your project.
To ensure you get the best deal, compare loan offers from several lenders, paying close attention to interest rates and terms.
Frequently asked questions on home equity for home improvements
Before using your home equity for home improvement projects, it’s important to understand the basics.
Below are answers to some common questions homeowners ask when considering this option.
How much equity should I have before borrowing?
You should ideally have 15-20% equity in your home before borrowing against it.
This helps ensure you’re not over-leveraging your property and can manage unexpected financial changes, like shifts in interest rates or home values.
Lenders also use this as a benchmark to determine whether you’re borrowing responsibly.
How can I estimate home improvement costs before borrowing?
Research typical renovation costs before borrowing against your home equity for a home improvement project.
- You’ll also want to consider getting multiple contractor quotes
- Set aside a contingency fund—unexpected expenses can arise
Planning can help you borrow the right amount and avoid additional loans later.
How will home improvements affect my future home sale?
While improving your home with equity can raise its value, not all renovations offer the same return on investment (ROI).
For example, kitchen and bathroom remodels generally have a higher ROI than projects like adding a swimming pool or high-end landscaping.
It’s a good idea to prioritize improvements that can improve your home’s resale value and appeal to future buyers while still enjoying the upgrades yourself.
Home equity for home improvement—The bottom line
Whether through cash-out refinancing or a home equity loan, understanding how each option works and aligning it with your financial goals is essential.
Before proceeding, weigh the benefits—such as increased home value and comfort—against potential risks like added debt and foreclosure.
With careful planning, you can enhance your property while maintaining financial stability.
Connect with MyPerfectMortgage.com for home equity solutions
If you want to learn more about how your home equity can be used to improve your home, fill out our simple online form. It’s free, no obligation, and we can connect you with the right home equity solution.
