Using a home equity loan for home improvements

Mother and daughter in their beautiful kitchen after completing the home improvement project by using home equity

Financing a remodeling project with a home equity loan can be a cost-effective way to upgrade and personalize your home. There are many renovation choices, including installing a deck, finishing your basement, remodeling your kitchen, or adding a bathroom.These projects may improve your family’s functionality and comfort now and increase your home’s value if you decide to sell it in the future.

To  qualify for a home equity loan, you must have positive equity in your current property. Equity is the difference between the market value of your home (what it could sell for) and the amount you still owe on your mortgage. You may also need to meet other lending requirements, including income and credit verification.

Benefits of using a home equity loan for home improvement projects

Several factors make a home equity an attractive financing option for some homeowners.

Lower interest rate

Because home equity loans are secured by your home, you may get an attractive interest rate that is lower than an unsecured loan or credit card.

Tax benefits

If you use the funds from a home equity loan for home improvement, you might be able to deduct the interest you pay on your tax return. A tax expert can estimate how much, if any, interest will be deductible based on your financial situation.

Select a payback period to fit your budget

Home equity loans typically offer a range of repayment terms, with some going up to 30 years. This flexibility lets you determine what payback period works best for your budget.

Increased home value

Some home improvements may increase your property’s worth. A local real estate professional can help you predict the impact your renovation will have on your home’s resale value. Some homeowners use home equity loans to make specific high return improvements to increase their property’s appeal.

Discover ® Home Loans offers low fixed rates on home equity loans with terms of 10, 15, 20, or 30 years and $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.  

Tips for getting the most out of your home equity loan

Set a budget and stick to it

Since a home equity loan is issued for a one-time set dollar amount, determine how much your project will cost before you apply for this type of refinancing. Obtain estimates and discuss the scope with professionals to establish a realistic budget. You may want to add 10% to 15% to the estimates to cover overruns.

Understand the differences between equity and return on investment (ROI)

Equity is the value of your home above its existing mortgage. ROI is the return on investment for your project. Home improvements may increase your equity but not return 100% of what you spend. For example, spending $20,000 on a minor kitchen remodel may increase the value of your home by only $16,000. Keep these financial projections in mind.

Balance your current needs with resale value

You may make a home improvement that improves your comfort and meets your personal needs for daily living. However, personalizing too much may reduce your ultimate ROI since potential home buyers may not share your taste.

A home equity loan for home improvements might make sense

Using a home equity loan for remodeling may help you upgrade your property. A lower interest rate, tax benefits, and the option of spreading payments over a long period of time may offer additional benefits, depending on your circumstances.

Closing thoughts: Typical characteristics of a home equity loan

A typical home equity loan has some similarities to and differences from a primary mortgage:

You may be able to select a fixed payback period within a range to fit your budget.
A home equity loan often comes with a fixed interest rate, which applies for the duration of the loan.
You’ll receive a lump sum payment when you close the loan.
Interest begins accruing when the loan funds.
The loan is secured by your home.
Closing costs may be lower than a primary mortgage.

With numerous advantages, including potentially lower interest rates and multiple options for repayment terms, a home equity loan may be a beneficial way to tap into your home equity to fund renovations, repairs, or upgrades. However, before you decide to apply for a loan, use online tools like a loan amount calculator or monthly payment calculator to get a sense of what might work for your budget.

The information provided in this article is for informational purposes only and is not intended as a substitute for professional advice. Make sure to consult a tax advisor for information about what tax benefits you may be eligible for with a home equity loan. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank, its affiliates, or successors.