Home equity loan for renovation: how does it work?


Benefits of using a home equity loan for your renovation

There are several advantages to relying on a home loan to pay for your home renovation. Here are some of the main benefits:

Low interest rates

You will generally pay lower mortgage rates when you take out a home equity loan. This is because lenders consider home equity loans to be less risky than unsecured personal loans or credit card debt.

Home equity loans are secured by your home. If you don’t make your payments, your lender can foreclose on your home, giving them more protection and the freedom to attach a lower interest rate to your loan.

However, to qualify for the lowest rates, you’ll need a good FICO® credit score. Lenders generally consider any FICO® score of 740 or higher to be a very good score, and one that comes with the lowest interest rates.

Fiscal advantages

The interest you pay on a home equity loan may be tax deductible, saving you money at income tax time. To qualify for the mortgage interest deduction, you must use your mortgage to buy, build, or significantly improve your home. Using funds from your home equity loan to pay for renovations or renovations to a home will qualify. However, if you use your home equity loan to pay off high-interest credit card debt or to pay for a child’s college tuition, you cannot deduct the interest you pay on the loan.

You can only deduct the interest you pay on up to $750,000 of combined mortgage debt. If you are paying off a principal mortgage of $300,000 and a home equity loan of $80,000, then you can deduct all the interest you paid on those loans during the year. You must itemize your taxes to claim the mortgage interest deduction. You cannot claim this if you instead take the standard deduction available to all taxpayers.

Initial lump sum

When you take out a home equity loan, you receive your funds in one lump sum payment. This gives you the freedom to use these funds immediately and on any home improvement or renovation project you choose.

Return on investment

Depending on how you spend your home equity loan money, you can increase the value of your home, which will pay off when you sell it. Kitchen renovations, for example, usually help increase the value of your home. Adding an extra bedroom or building a master bathroom can also increase the value of your home.

Long recovery period

You also have the option of choosing a loan term. You can choose a shorter-term home equity loan, such as 5 years, if you want to pay off your loan quickly and spend as little interest as possible. But you can extend the term of your loan – to, say, 10 or 15 years – if you want a smaller monthly payment. Just be aware that the longer your loan term, the more interest you will pay during the term of that loan.


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