How to Put Your Home Equity Toward Home Improvements

But first, let’s make sure we’re on the same page where home equity is concerned.

How to Put Your Home Equity Toward Home Improvements

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What is home equity?

Home equity is essentially the amount of your home’s value that you own. Let’s say your home is worth $400,000, and you still owe $200,000 on your mortgage(s). That means you have 50% equity in your home. If the value of the house goes up, you’ll have more equity. In fact, homeowners gained an average of $25,000 in equity through the first half of 2024.

While the market has cooled a bit as of November of 2024, prices are expected to keep rising into 2025. “Prices are still going up,” Kaplan tells us. “The trajectory is not as high as it was. But it’s still going up, for sure.”

Using your home equity to make home improvements

Important

If you use your equity loan to pay for home improvements, your interest on the loan may be tax deductible.

If you own at least 20% equity in your home, you can get an equity-based loan for up to around 85% of that amount as a new mortgage. Realtor.com claims that, as of September of 2024, homeowners average about $315,000 in equity. If you got a loan for 85% of that, it would be worth $267,750—enough to do just about any home improvement project you want.

If you use your equity loan to pay for home improvements, your interest on the loan may be tax deductible. (To quote the IRS, “It depends.” Investigate the terms of your loan before you take deductions.)

Three of the most popular ways to leverage your home equity are the home equity loan, the home equity line of credit (HELOC), and the cash-out refinance. Let’s look at the key differences.

Home equity loan

With a home equity loan, your loan comes in a single lump sum, which you receive as a second mortgage that you pay alongside your current mortgage. Your payback term length can be anywhere from five to 30 years, depending on the amount of your loan and the size of the payments you want to make.

Home equity line of credit

A HELOC is very similar to a home equity loan, but instead of a single lump sum, you have access to a rotating line of credit. You can borrow as much or as little as you need, and you only owe payments on the portion you borrow. In fact, you can borrow and repay, then borrow again. 

The flexibility is convenient if you don’t know exactly what your improvements will cost. “Maybe you’re making home improvements over time, and you don’t quite know what the price is,” Sayers said. “But you have a $30,000 line of credit sitting there that you can just tap into.”

Kaplan has a friend who does this for ongoing improvements. “Every year, he wants to do something significant to his house. One year, he put in new copper gutters, which are a pricey item. One year, he put in a pool and a spa. And then he pays it off over the next year.”

HELOCs have a “draw period,” during which you have access to the funds, which generally lasts about 10 years. Then there’s a “repayment period,” during which you pay back any outstanding balance as a second mortgage for up to 20 years.

Cash-out refinance

Instead of a second mortgage, a cash-out refinance is a single, new mortgage. The loan pays off your current mortgage and replaces it with one for a larger amount that includes the funds you’re borrowing. You’ll still have only one mortgage to keep track of.

The downsides of using home equity

Time and money

Since all of these options are mortgages, you can expect a time commitment, fees, and probably an appraisal—all the elements that come with a mortgage application process. “It takes about 30 days for a bank to be able to complete the appropriate amount of paperwork to get the funds distributed to you,” Sayers explains. “So if you’re in a hurry, especially if it’s an emergency, home equity might not be the right choice.”

Possibility of losing your home

These are “secured loans,” meaning you’re using your house as collateral. If you fail to keep up with the payments, you could lose your home. This is why interest rates are lower; with your home on the line, the loan is less risky for the lender.

Loss of equity

You can’t have your equity and eat it too. If you convert some of your equity back into debt, that equity is no longer yours. 

On the other hand, home improvements can increase your home’s value, thereby creating more equity. “Any time you’re adding square footage, if you’re updating or modernizing, it’s always a good choice,” Kaplan suggests. “Updating your bathrooms and kitchens is fantastic.” And even simpler: “Paint is one of those things that will give you a tremendous return on investment.”

The curious case of the reverse mortgage

Another equity-based option to get access to cash is the reverse mortgage. It differs quite a bit from the above options in its qualifications:

• You must be 62 or older to qualify.
• You must own at least 50% equity in your home. 
• The home must be your primary residence.

Another detail that makes this mortgage unique is that you don’t pay it back while you’re living in the home. You can take your loan as a lump sum or a monthly payment, and as long as you pay your property taxes and homeowner’s insurance, you can use the money toward home improvements or anything else.

The funds are due when the borrower leaves the home—moves out, sells it, or passes away. At that point, the loan is due with interest, which means your estate or your heirs may be on the hook for it. Make sure you understand all the implications before applying for a reverse mortgage.

Tip

Another equity-based option to get access to cash is the reverse mortgage.

Non-equity options

Cash

Cash from savings, according to the Houzz study, is by far the most popular way to pay for an improvement. Paying with cash is straightforward. Once you hand it over, the transaction is done, and you don’t have to worry about payment plans or interest. Some contractors even offer a discount if you pay in cash.

As Sayers puts it, “Cash is easy, right?” However, he says, “not everybody wants to spend tens of thousands of dollars in cash. They want to save that for a rainy day.” That much cash can take a long time to save up, and once you spend it, it’s gone. “People might rather pay over time.”

Credit card

A credit card will allow you to spread out your payment a bit more. If you have strong credit, you can find a card with a 0% APR for the first year or two. If you are able to pay down the debt in that time, you’ll have paid for your home improvement interest-free.

The downside is that, once that introductory period ends, the APR of a credit card is quite high—often upwards of 20%, if not more. Even worse, many cards with a 0% introductory rate charge deferred interest, meaning that if you don’t pay off the debt by the end of the introductory period, you will owe interest retroactively on the entire purchase—even what you’ve already paid for. 

Personal loans

Personal loans, like the ones you can find through Acorn Finance, are unsecured loans, meaning you’re not putting your home up as collateral and won’t be in danger of losing it if you can’t keep up with payments.

This will result in interest rates being higher than on a secured loan, probably by about 2 to 3 percentage points.

Sayers mentions a major advantage to personal loan: speed. “If you need the funds the next day, a personal loan lender can do that,” he says. “We have lenders on the Acorn Finance platform that could offer those as soon as next day, if you have a decent credit score, typically 620 or above.”

This is great for emergencies that can’t wait for the month-long process of a new mortgage, or if you just can’t wait to get started on improving your home.

The Acorn Finance advantage

Acorn Finance is a convenient and easy way to find a personal loan for your project. Enter the amount you’re looking to spend, and in minutes you’ll see an array of personal loans you’re already prequalified for. Loans range from $1,000 to $100,000, which will cover a lot of home improvement projects, and you can browse them by what’s important to you, like interest rate or payback period, until you find a perfect fit.