Tapping your home equity to fund renovations
If you've built up equity in your home, borrowing against it is one of the most affordable ways to finance renovations. The two primary options — a HELOC (Home Equity Line of Credit) and a home equity loan — work differently and suit different situations.
Key differences at a glance
| Feature | HELOC | Home equity loan |
|---|---|---|
| Structure | Revolving credit line | Lump-sum disbursement |
| Interest rate | Variable (prime + margin) | Fixed for the life of the loan |
| Payment | Interest-only during draw period; principal + interest after | Fixed monthly payment from day one |
| Best for | Ongoing or phased projects | One-time, defined-cost projects |
| Typical term | 10-year draw + 20-year repayment | 5–30 years |
| Closing costs | $0–$500 (often waived) | 2–5% of loan amount |
When a HELOC makes sense
- You're doing phased renovations and don't know the exact total cost upfront.
- You want flexibility to draw funds as needed and only pay interest on what you use.
- You plan to pay down the balance quickly before rates rise significantly.
- You want an ongoing credit line for future projects or emergencies.
When a home equity loan is better
- You have a well-defined project with a known total cost (e.g., a $40,000 kitchen remodel).
- You prefer predictable fixed monthly payments for easier budgeting.
- You're concerned about rising interest rates and want to lock in today's rate.
- You need the full amount upfront to pay a contractor.
How much can you borrow?
Most lenders let you borrow up to 80–85% of your home's appraised value, minus your remaining mortgage balance. For example, if your home is worth $400,000 and you owe $250,000, you could potentially borrow up to $70,000–$90,000.
Tax considerations
Interest on home equity borrowing is tax-deductible if the funds are used to "buy, build, or substantially improve" your home (IRS rules). Keep receipts and documentation for your tax advisor.
FAQ
Is my home at risk?
Yes — both HELOCs and home equity loans use your home as collateral. If you can't make payments, the lender can foreclose. Borrow only what you can comfortably repay.
Can I get approved with less-than-perfect credit?
Most lenders require a minimum credit score of 620–680 for home equity products. Higher scores get better rates. Shopping multiple lenders is essential.