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Best Ways to Tap Home Equity for Home Improvements
Using your home equity financing products may allow you to borrow more at a lower interest rate compared to credit cards or personal loans.
Key Takeaways
- ✓Tapping into home equity can provide substantial funds for home improvements at lower interest rates than personal loans or credit cards.
- ✓Home equity loans, HELOCs, cash-out refinances and FHA 203(k) rehab loans have distinct advantages and drawbacks.
- ✓While using home equity for renovations can enhance property value, it's crucial to consider closing costs, foreclosure risk and the impact of fluctuating property values.
- ✓Thanks to strong home appreciation, Americans have accumulated $35 trillion in home equity, which can fund renovations and improvements that boost their home's appeal and resale value.
There are several popular ways to liquidate home equity, including a home equity loan, home equity line of credit, cash-out refinance and FHA 203(k) rehab loan. Homeowners should consider each home improvement loan's pros and cons and determine which option will best meet their needs. You don't necessarily have to pull from your home equity to fund a major remodel or other home improvement goal. Other options include taking out a personal loan, using credit cards, or applying for a personal line of credit from a bank or lender. However, a home equity loan or line of credit is often a smarter move. Loans backed by home equity are less risky for lenders, so their interest rates are lower and terms are more favorable.
Pros of Using Home Equity for Remodel
✅ You Can Borrow More
If you have a lot of unused home equity, you may qualify to borrow a lot more than the limits imposed by non-home-equity financing options, like personal loans or credit cards. The average home renovation project budget in 2025 is more than $52,000, with typical expenses ranging from around $19,000 to more than $88,000 for most homeowners.
✅ Interest Rates Are Lower
Home equity financing products typically offer lower interest rates than credit cards or loans not backed by real estate. Paying a lower rate means potentially saving thousands over the life of your loan.
✅ Enjoy Longer Repayment Terms
Home equity repayment terms generally run between five and 30 years. Extending repayment reduces your payment and can make the loan more affordable. Most personal loan providers set their maximum term at five to seven years.
✅ Reap Tax Savings
You could be eligible for a tax deduction on the interest you pay for a home equity loan or HELOC if you use it for a home improvement project, although you'll need to consult with your tax advisor to see if you qualify.
Cons of Using Home Equity for Remodel
⚠️ You'll Pay Closing Costs
Expect to pay 2% to 5% of the loan amount or credit limit at closing. Fees and interest rates can vary widely among lenders and products, so it's important to compare.
⚠️ Your Home Is at Risk
Home equity financing is secured by your home. Missing home equity loan payments could lead to default and foreclosure, even if your first mortgage is in good standing.
⚠️ You May Pay More Interest Than You Think
The longer repayment terms available with home equity financing are a double-edged sword. Extending the repayment period to lower what you pay each month increases your interest cost over the life of the loan.
⚠️ Interest Rates and Payments Can Increase
Many HELOCs come with variable interest rates that can change your payment and costs significantly over the life of the loan. Once the drawing period ends, the entire balance must be repaid over the remaining loan term, and payments can rise sharply.
⚠️ Getting Approved Could Take Longer
The lender must appraise the property in addition to evaluating your credit history, income and debts. Home equity financing usually takes a little longer to fund than a consumer loan alternative, like an unsecured personal loan.
⚠️ It Could Lead to Negative Equity
Tapping a substantial portion of your home's equity can be risky if property values decline, leading to negative equity — when your outstanding loan balance surpasses your home's current market value.
Best Home Improvement Loans
HELOC
A HELOC is a flexible line of credit that works similarly to a credit card. You can borrow as needed up to a preset limit and only pay interest on the amount you use. HELOC lenders generally allow total borrowing against 80% to 90% of the home's value. A HELOC operates in two main stages: the draw period and the repayment period. During the draw period, you can borrow against the line of credit and are only required to make minimum or interest-only payments on your balance.
"HELOCs are a great way to access home equity, acting almost like a credit card on your home. This is a line of credit that traditionally follows the prime borrowing rate, which historically is somewhere between 0.35% and 0.5% above the average 30-year mortgage interest rate. Right now, however, that is a disadvantage because it's providing a rate in the mid- to high-7% range."
— Ralph DiBugnara, President of Home Qualified
Home Equity Loan
As with a HELOC, you can likely borrow against 80% to 90% of your property value with a home equity loan. You receive a lump sum when you close your loan, and you repay it with fixed monthly payments. Home equity loan terms typically run between five and 20 years, with some lenders offering up to 30 years. It's a solid choice if you have a well-planned project and can comfortably manage the repayments.
Cash-Out Refinance
A cash-out refinance involves replacing your existing mortgage with a new, larger loan, allowing you to take the difference in cash. Lenders typically approve cash-out refinances up to 80% of your home's appraised value. A cash-out refi provides a large lump sum at closing and may come with a lower rate than a home equity loan or HELOC, and the interest could be tax deductible. However, it resets your primary mortgage loan term, which could mean paying more interest over time.
FHA 203(k) Rehab Refi
The FHA's 203(k) Rehabilitation Mortgage Insurance program enables homebuyers to finance both the purchase and renovation costs of a property with one loan. The limited 203(k) loan allows financing up to $75,000 for non-structural repairs and improvements. The standard 203(k) loan covers more extensive renovations, including structural repairs, and has a minimum borrowing amount of $5,000.
Which Is the Best Option for You?
| Product | Best For |
|---|---|
| Home Equity Loan | Borrowers with a low first-mortgage rate who want fixed payments and know their renovation costs upfront. |
| HELOC | Homeowners unsure of total renovation costs who want flexibility and are comfortable with a variable rate. |
| Cash-Out Refinance | Homeowners with a high first-mortgage rate who can benefit from refinancing to a lower rate. |
| FHA 203(k) Loan | Homeowners with low equity and limited funds who need to finance both purchase and renovation costs. |
Key Takeaway
Americans are sitting on record home equity — and there are smart ways to put it to work. Whether you choose a HELOC, home equity loan, cash-out refi, or FHA 203(k), the right option depends on your project scope, risk tolerance, and current mortgage rate.
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