How to use home equity to remodel your home

The article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer home equity loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.

Quick insights

• You can use home equity to remodel by taking out a home equity loan or home equity line of credit (HELOC).
• Either option allows you to borrow against your current equity, which you can put to use to potentially increase your home's value through renovations.
• Lenders generally allow you to borrow up to 80% of your home’s equity, and using it has potential benefits and drawbacks.

Some homes have plenty of potential but need some work—an outdated kitchen, worn bathrooms or an overgrown backyard. If you’re considering using your home equity to fund remodeling, it’s important to understand the process, then weigh the pros and cons.

In this article, we’ll explore home equity loans and HELOCs, at least two options that can tap your home equity for renovation.

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 are usually lower than those for personal loans but depend on factors like your credit score. The amount of the loan you qualify for depends on several factors, including your current home equity.

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 similar to a credit card. A lender would provide a line of credit for a set amount that you can draw from during a draw period. It often lasts 3-10 years, depending on the lender, offering flexibility that could help you pay for renovation projects or materials for years to come.

HELOCs typically have variable interest rates, which mean monthly payments can change from one 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

Start by identifying the specific renovations you want—a kitchen update, basement finishing or an addition, for example. Get quotes from contractors and factor in all the costs, including materials, labor and permits. 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 securing a loan or HELOC.

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. Determine your home equity

The amount of equity you have in your home is based on its current value minus your outstanding mortgage balance. If your home is valued at $300,000, and you still owe $200,000 on your mortgage, you’d have $100,000 in equity. Lenders will typically lend up to 80% of the value of the home, including existing first lien and a new HELOC.

3. Decide on a way of accessing your equity

The right choice is the option that works for your budget and goals. Each way of accessing your home equity could provide the same amount but offers different repayment terms. HELOCs, for example, 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 may be able to compare the terms and requirements before applying for a home equity product. Applications usually require details about your home and finances. Lenders might also require an appraisal to help determine your equity. It’s key to understand the repayment terms and any closing costs before signing an agreement.

Pros and cons of using home equity for renovations

Using home equity to finance a renovation project can offer several benefits. Considering both the benefits and risks can help make a decision.

Pros

• Lower interest rates: Home equity products often come with lower interest rates compared to other forms of financing, such as credit cards. This can make using home equity a more affordable option for funding home improvements.
• Increased home value: Specific remodeling projects, such as adding a bathroom, may increase a home’s value. This can be particularly beneficial if you are planning to sell the property in the future.
• Flexibility: Loan amounts and repayment terms are a couple examples of how tapping home equity can be somewhat adaptable to various renovations.

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 of 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 for remodeling.

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.

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.

Proper planning, budgeting and understanding alternative financing options are key to making the right decision. You may want to evaluate your remodeling plans and long-term financial goals with a Home Lending Advisor.