Home equity loans for remodeling: A smart way to renovate

What you’ll learn ✅

• When it makes sense to use a home equity loan for a remodel

• What the pros and cons are

• Which alternative financing options to consider

Tapping into your equity is a strategic way to pay for a major home renovation without refinancing your mortgage or dipping into savings. One of the most popular options is a home equity loan, a quick cash injection borrowed against your property.

Below, you’ll learn when using a home equity loan for a remodel makes sense and how to do it. Explore the pros and cons, and learn about funding alternatives to see which method might fit your needs.

Should you use a home equity loan for remodeling?

A home equity loan is a second mortgage that gives you a lump sum of cash by using your equity as collateral. Homeowners often put the funds toward large expenses like college tuition, consolidating high-interest debt, and, of course, home improvements.

Renovations can be pricey, so many homeowners hesitate at draining savings accounts or charging their credit cards. With an average interest rate below 8%, a home equity loan is typically a more cost-effective choice that doesn’t require you to dip into your cash reserves.

Home equity loans have longer repayment terms, which helps you spread out the cost over time. Plus, since they typically come with fixed rather than variable interest rates, you often won’t have to worry about market fluctuations increasing your payments. Fixed interest rates also make it easier to calculate your monthly budget.

Home equity loans put your house on the line as collateral. The trade-off is something like choosing a health insurance plan with a higher deductible to get lower monthly premiums. You’re taking on more risk, but you’ll end up paying less if everything goes according to plan.

While using a home equity loan for repairs and renovations has plenty of benefits, it doesn’t suit every scenario. For example, if you don’t have much equity built up, it might be difficult to secure lender approval. It also isn’t ideal if your project only costs a few thousand dollars, as the lower interest rate may not be enough to justify closing costs.

Home equity calculation: Find your usable amount

If you’re considering a home equity loan to fund your next project, you need to know how much equity you have available. To find out, subtract how much you still owe on your mortgage from the home’s appraised value.

Say your home is worth $500,000 and you have $400,000 left on your mortgage. This makes your total equity $100,000 (or 20%). Lenders typically let you borrow up to 85% of your home’s value, minus what you still owe. In this example, that equals out to $25,000. Here’s a breakdown of the math:

85% of $500,000 = $425,000

$425,000 − $400,000 = $25,000

How to use home equity to pay for a remodel

Using a home equity loan for home improvements is pretty straightforward. Here’s how to do it.

1. Estimate project cost

Start by calculating your home improvement project’s costs. Contact local contractors, and gather comprehensive quotes that include the cost of materials, labor, and permits. This doesn’t have to be exact — you just need to know an approximate of how much cash you’ll need.

2. Calculate home equity

Work out how much equity you’ve built in your home. This shows how much you can comfortably borrow and whether you can realistically afford to fund your project.

3. Apply and secure funding

Once you’ve fixed a budget, chosen a contractor, and determined your borrowing amount, compare offers from different lenders. You don’t have to go with the first lender that accepts your application. Contact various providers, and find the best terms for you — even a small difference in interest rate or closing costs can save you thousands of dollars. The application process is usually free, so there’s no reason not to shop around.

Better’s AI tech, known as Betsy, does some of the shopping around for you, evaluating 21,600 loan scenarios to find your best rate.¹

Pros and cons of using a home equity loan for house renovation

Home equity loans are a great way to tap into funds and finish a project, but there are some potential drawbacks to consider. Let’s take a look at the pros and cons.

Pros of home equity loans for remodeling

Here are the main advantages of using home equity loans for renovations:

• Lower interest rates: Home equity loans tend to have more favorable interest rates than other common choices, like credit cards and personal loans.

• Predictable payments: It’s easier to budget for home equity loans because they usually have fixed interest rates. This results in consistent payments month to month.

• Lump sum financing: This option provides access to the entire loan up front, letting homeowners pay for large renovations all at once.

Cons of home equity loans for remodeling

Here are a few cons to be aware of when tapping into your equity:

• Foreclosure risk: Using equity to renovate your home requires putting your house up as collateral. That means you could lose your property if you can’t afford to repay the mortgage.

• Closing costs: Like most mortgages, finalizing a home equity loan requires paying closing costs. If the renovation is on the smaller side, closing costs can outweigh the benefits of lower interest rates.

• Negative equity: If your equity is low and the housing market dips after you take out the mortgage, you could end up owing more than the house is worth.

Tips for using a home equity loan to remodel

These best practices will help you get the most out of your loan when renovating.

Make sure it adds value

If you’re going to spend a bundle on a home renovation, it’s a great idea to offset the cost by increasing market value at the same time. Some upgrades do this more effectively than others. According to a report by the National Association of Realtors, some of the highest value projects include:

• Steel front door, tends to recover 100% of the cost

• Closet renovation, tends to recover 83% of the cost

• Vinyl windows, tends to recover 74% of the cost

Budget wisely

Make sure your project estimates account for every detail so you don’t go over budget unexpectedly. For example, renting a dumpster is a common expense but easy to forget. This alone can add $300–800 to your total.

Build in a cushion just in case — setting aside a few thousand dollars of contingency money helps you move forward more confidently. You can always apply what you don’t use to paying down the mortgage faster.

If you’re looking to create a stronger, more flexible budget, secure your financing with Better. We can help lower your monthly payments by offering industry-leading home equity loan interest rates. Gather basic contact details and financial information, then apply in as little as three minutes to see how much you can afford.

...in as little as 3 minutes – no credit impact

Alternatives to a home equity loan for remodeling

Home equity loans aren’t the only kind of home improvement loans available. Other financing options include:

• Home equity lines of credit (HELOCs): This option is one of the most popular choices for taking out a home improvement loan using equity. Instead of a lump sum, HELOCs offer a revolving line of credit borrowers can draw from as needed. HELOC interest rates are in the same ballpark as for home equity loans, averaging a little over 7%.

• Cash-out refinance: These loans give you a lump sum you use to pay off your original mortgage. You fund the renovation by keeping the difference between the cash-out refinance amount and the original loan amount.

• Personal loans: These loans are common for small renovations. Some lenders even offer a specific type called a home improvement loan. They don’t use your home as collateral, eliminating the risk of foreclosure. However, they have higher interest rates than home equity loans and HELOCs.

• Credit cards: It’s possible to use a credit card to fund a home improvement project, but due to the significantly high interest rates, most homeowners opt for other options.

Secure Better financing, and upgrade your home

Taking out a home equity loan to remodel your home can be a solid choice, letting you quickly fund a project and pay it off steadily. It isn’t for everyone, but that’s why there are so many options out there. Whether you’re locking in a home equity loan or a HELOC, Better makes financing quick and easy.

With our fully online application process, you can get your cash estimate in as little as three minutes and start browsing loans. If you like what you see and decide to move forward, our friendly support staff is standing by 24/7 to field any questions or concerns that pop up.

Apply today to lock in a competitive rate and take the first step toward refreshing your home with Better.

...in as little as 3 minutes – no credit impact

FAQ

Should I use a home equity loan for my remodel?

A home equity loan might be a good idea for your renovation project if you want to land a lower interest rate than other financing options like credit cards and personal loans. Additionally, home equity loans typically come with fixed instead of variable interest rates. That means monthly payment affordability stays stable and predictable throughout the life of the mortgage.

How much home equity do I actually have to use?

The lender borrowing limit is typically up to 85% of the appraisal value minus what you still owe. But you don’t have to take the full amount. To decide how much to use, estimate your project costs, determine your total usable equity, and decide how much of that number you’d feel comfortable tapping into.

¹Disclaimer: Betsy evaluates loan scenarios using currently available data across participating investors, product types, loan terms, and rate assumptions. The stated number of scenarios reflects a mathematical combination of these inputs (including multiple investors, product categories, loan terms, and rate variations) and does not represent a guarantee that all scenarios are available to every borrower or that any specific rate or loan will be offered. Actual loan options, rates, and terms depend on individual borrower qualifications, credit profile, property characteristics, loan amount, market conditions, and lender requirements at the time of application.