How to use your home equity to finance home improvements

There are three main ways to tap into the equity you’ve built in your home. Each has its advantages and disadvantages.

Whether you want to remodel your entire home or just upgrade the kitchen, funding your project is a key step in the process. Using your home’s equity may be the best way for you to do it.

Banks typically lend up to 90 percent of the equity value you’ve built in your home. So, for example, if you have $150,000 in home equity, you may be able to borrow up to $135,000, using your home as collateral.

Work with your bank to determine how much of your home equity you can tap into because lender amounts, rates and terms will vary. Whatever amount you borrow, you can use the loan to fund your projects: roof upgrade, new patio deck, interior renovations, etc. Whenever you take out a loan, it is smart to be clear on stipulations in the agreement about how you can use the funds.

 

Three ways to borrow on your equity

Each method has advantages and disadvantages. You should determine what option best fits your situation.
 

A home equity loan

Also known as a second mortgage, these loans allow you to borrow a set amount of money for your project. You will be given a fixed interest rate and be expected to make monthly payments commencing immediately upon taking out the loan.

• May be right for you: If you have a major renovation for which you’ll need a substantial amount upfront, and you’re looking for a  competitive, fixed interest rate.

A home equity line of credit (HELOC)

A HELOC allows you access to a line of credit. You can use as much of the money available, whenever and however you choose over a fixed period, often 10 years.

Repayment is based on the terms of your HELOC but is much more flexible than a home equity loan. While you need to make only minimum monthly payments, the final amount that you borrow will have to be repaid at the end of the agreement. These loans are offered with a range of variable interest rates.

• May be right for you: If you’re doing several smaller projects that require incremental funding, or you won’t be sure how much you need to spend until you’re halfway through.

Home refinancing

Getting funding through a home refinance involves updating your current home mortgage, adjusting the interest rates or terms of the loan and taking out cash at the same time. You’ll be reducing the equity you have in your home. Home refinancing can reduce your monthly mortgage payment if you extend the term of your repayment schedule. 

• May be right for you: If your credit has improved or interest rates have gone down since you took out the original mortgage, you’ll want to capture a lower interest rate on your mortgage as a whole.
• May be right for you: You may also be able to get a lump sum without increasing your monthly payments if you extend the length of the loan. This can make a project far more affordable in the short term. 
   

Should you take out a loan of some sort?

When contemplating your financing options, review first how much is available for you to borrow. And then think about how much you can actually afford. Remember that loan originations involve fees and costs, so factor those into your calculation. And consider the long-term effect of having (likely) higher monthly financial obligations. Are you comfortable with this?

If, after serious consideration, you’re still ready — and your project will be well within this budget — it might be time to talk to a lender about how to use your home equity.  
 

Learn more about home equity options.

 

Mortgage and Home Equity products are offered by U.S. Bank National Association. Loan products are offered by U.S. Bank National Association and subject to normal credit approval.