Let’s take a look at the pros and cons of using a home equity loan for a remodel, when it makes sense to do so, and how to go about using a home equity loan wisely.
Pros and Cons of Using a Home Equity Loan for a Remodel
Pros Explained
Lower-interest method of financing a remodel: There are many different ways to finance a remodel, but using a home equity loan for a remodel can save you money in interest compared to using a personal loan or credit card. Can increase the value of your home: Using a home equity loan to remodel your house can make your property more valuable, especially if you choose an option that provides a high return on investment (ROI). Interest paid is tax-deductible: Home equity loans that are used to remodel your property allow you to deduct any interest paid on your taxes.
Cons Explained
You may need to pay closing costs: Depending on your lender, you may be on the hook for closing costs on the home equity loan, including origination fees and appraisal fees. The remodel may not recoup your costs: This is most important if you’re remodeling for resale; choosing a poor investment may mean you won’t be able to get back much of the money you’ll pay. You’ll owe interest: Anytime you borrow money, you’ll need to pay interest. Your interest rate will depend on a number of factors, including your lender, credit score, and the market value of your home.
When It Makes Sense To Use a Home Equity Loan for Remodeling
Using a home equity loan to remodel your house can be a good idea if you’re looking to increase the value of your property. Typically, remodeling can be a reliable method to do so, especially if you pick your projects carefully. Some changes can recoup as much as 93% of the money you’ve paid in value. However, if you’re choosing to get a home equity loan because you otherwise can’t afford a remodel, you may want to consider your situation more carefully. You’ll need to repay the loan, plus interest, and if you’re already struggling, the payments may become unmanageable. This is even more pertinent with some specific loans; those that allow interest-only payments may have a much larger balloon payment at the end of the loan term.
How To Use a Home Equity Loan Wisely
Tapping into your home equity can be a wise option, but be sure you’re using the loan correctly.
Beware of Overspending
Depending on how much equity you have in your property, you may be able to get a very large home equity loan. However, just because it’s there, doesn’t mean you have to spend it. Choose your renovations, assess the budget you’ll need, and stick to it. Don’t spend all your money on unanticipated upgrades—remember, you’ll be paying interest on every penny you spend.
Pick the Right Projects
Although tearing down that spare bedroom to make yourself a large master suite may be your dream, use discretion when planning improvements. Not all projects will add value to your property, and if you’re ever looking to resell, you’ll want to keep this in mind.
Stick to a Remodel
Home equity loans aren’t tied to remodeling projects; in fact, you can use the money for almost anything you’d like. But you’re only able to deduct the interest you pay if the loan is used to buy, build, or substantially improve your home that secures the loan.
Deduct Your Interest
Be sure you’re correctly deducting the interest you’re paying on your home equity loan. You’ll need to file an itemized tax return rather than taking a standard deduction, but this may be worth it—even more so if your home equity loan is large. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
