Why it’s smart to use your home equity for remodeling

Fewer houses are available for sale. Home prices keep climbing. Mortgage rates remain high. It’s no wonder that homeowners who want to trade up are rejecting the idea of packing and moving — choosing to stay put and renovate their homes instead.

And to pay for these pricey remodels and repairs, they’re tapping the equity they have in their homes: using home equity loans and lines of credit (HELOCs) to turn their ownership stake into ready cash. The rise in property values has sent equity stakes soaring to a collective $17.8 trillion in the second quarter of 2025. That comes out to about $302,000 per mortgage-holding homeowner.

By using your home equity to fund renovations, you are essentially using your home’s worth to improve its worth. While a shrewd strategy, it has drawbacks too, and evaluating the advantages and disadvantages is crucial before you draw on your ownership stake.

Why using home equity for home improvement makes sense in 2025

The average mortgage-holding homeowner has about $194,00 in trappable equity, according to Cotality, an analyst of property data. (“Tappable equity” is the amount you can withdraw while still maintaining a 20 percent equity stake, which most lenders require you to do.)

Homeowners have been plowing those substantial equity stakes back into their residences. A 2025 survey by TD Bank found that the ongoing housing shortage and low interest rates on their first mortgages have encouraged many homeowners to stay put and spruce up their homes instead of moving.

“Although recent interest rate reductions have begun to shift the housing conversation, overall activity remains subdued, as many homeowners are reluctant to move and forego their current favorable mortgage rates,” says Steve Kaminski, head of residential lending at TD Bank.

Indeed, in the TD Bank survey, more than half of HELOC or home equity loan borrowers used the funds to invest in their current properties. The most popular projects included outdoor upgrades and eco-friendly additions.

HELOCs and home equity loan interest rates have been trending down since late 2024, and are currently averaging around 8 percent. They tend to be a more cost-effective option than other financing options, such as home improvement loans, personal loans or credit cards.

How does using home equity for home improvement work?

There are two primary ways to tap your home equity: home equity loans and HELOCs. The amount you can borrow is based on how much equity you have — that is, how much of the property you own outright.

Home equity loans function similarly to mortgages: You borrow a lump sum at a fixed interest rate. Repayment begins immediately and covers both interest and principal over a term of five to 30 years.

HELOCs provide a line of credit, similar to a credit card, and typically have a variable interest rate, though some lenders offer fixed-rate versions. HELOCs generally have a draw period of about 10 years, during which you can access funds, usually with interest-only payments (with the option to repay more). When the draw period ends, you can no longer access the funds — you enter a repayment period of 10 to 20 years, paying back the debt in monthly installments.

The amount you can borrow is typically determined by the size of your ownership stake and the loan-to-value ratio (LTV), which compares the loan size to the property’s value. Generally, lenders limit your borrowing capacity to around 80 or 85 percent of your equity. However, specific limits can depend on factors like your credit score, annual income and payment history.

Benefits of using home equity for home improvement

Lower interest rates

Home equity loans and lines of credit (HELOCs) offer comparatively lower interest rates because they are secured loans: that is, your home backs them as collateral. They parallel mortgage rates, running slightly higher (sometimes by several percentage points for HELOCs). In late 2025, the average home equity loan rate hovered around 8 percent.

In comparison, the average credit card interest rate is a steep 19.98 percent. The interest on personal loans is comparatively lower, at 12.25 percent, but still higher than what you’d pay on a secured form of financing.

But what does that difference in rate look like in dollars and cents? For a $20,000 remodeling project, consider the monthly payments and total interest costs associated with each form of financing (assuming near-average rates and a five-year repayment term).

Tax deduction

You can deduct the interest you pay on home equity loans and HELOCs annually on your tax return. But certain conditions apply. To qualify for the deduction, the funds obtained must have been used to purchase, repair or make significant improvements to the home securing the loan.

Possible return on investment

Using your home equity to invest in your home can be a smart financial move. Expanding the livable space, adding amenities, modernizing systems and fixtures, improving the appearance and curb appeal — all these actions can enhance a property’s worth. If you’re considering selling your house, renovations might help it sell quickly and for more money. If you stay put, they’ll help it appreciate (or at least not depreciate) in the long term, and of course, improve your quality of life in the meantime.

Drawbacks of using home equity for home improvement

Your home is on the line

The major downside of home equity financing: the potential to lose your home if you can’t keep up with the loan payments. In such cases, the lender may initiate foreclosure proceedings, and you could lose your home.

The loan might be more than you need

Home equity financing is typically large: at least five-figure sums. Often, lenders have minimum borrowing requirements — for example, the benchmark loan that Bankrate tracks is for $30,000 — which means you may need to borrow a substantial sum of money, potentially more than what you truly need. You could repay the excess early, but there may be penalties.

Additional costs

Borrowing a home equity loan involves upfront expenses. Since it’s a second mortgage, you’ll incur closing costs, such as origination and appraisal fees, ranging from 1 to 5 percent of the loan amount. When evaluating whether the loan is financially viable, factor in these fees and consider the interest rate as part of the cost of borrowing.

Home equity loans vs. HELOCs for home renovation

Home equity loans and HELOCs have numerous similarities: They both leverage the equity in your home, they both require your home as collateral and they typically enable you to borrow up to 80 or 85 percent of your home’s value, minus the remaining balance on your mortgage. However, despite these resemblances, the two have significant distinctions, each with advantages and disadvantages.

Home equity loans for home improvement

Home equity loans resemble traditional mortgages, with regular payments that include principal and interest. Essentially, they act as second mortgages and are typically available for five to 30 years. They can be a good financing tool if you know how much your renovation will cost, and it’s a single, relatively short-term job — like remodeling a bathroom, for example.

Home equity line of credit (HELOC) for home improvement

HELOCs are structured with a draw period and a repayment period. During the draw period, you can borrow money from the line of credit, and you typically make interest-only payments on the actual amount you borrow. Once this period ends, you can no longer access the funds and must begin repaying both the principal and the interest. HELOCs are well-suited for multifaceted, ongoing projects or those in which the overall cost is uncertain.

How much can you borrow with a home equity loan?

Before you renovate, determine how much you can borrow from your home’s equity for your project. Lenders typically let you borrow up to 80 or 85 percent of the equity in your home, although some may allow you to borrow more, up to 90 or even 95 percent.

Your equity stake is your home’s current value minus the outstanding mortgage balance. If you want to find out how much home equity you can borrow, use a home equity calculator online to get a general idea.

The amount you get — along with the interest rate and other terms — will depend on your credit score (mid-600s, at least), and debt-to-income ratio (no more than 43 percent). The higher your credit score and the lower your DTI, the more likely you’ll be able to borrow. Your lender will likely order an appraisal of your home to determine its value, and all calculations will be based on that figure.

What to consider before taking a home equity loan for remodeling

Before committing, it’s smart to carefully weigh the goals and consequences of pursuing a HELOC or home equity loan for home improvements. Here are crucial questions to ask yourself.

Does the remodel add value to your home?

Will tapping into your home equity eventually pay itself back, increasing your home’s worth? Renovations can vary significantly in their return on investment — anywhere from 30 percent to over 200 percent. Frankly, the majority don’t recoup their costs. And even if the returns are positive, don’t assume that because you put in an $80,000 swimming pool, you have bumped your home’s fair market value by $80,000, either.

Consult a real estate agent or an appraiser on which renovations enhance a home’s value and appeal to buyers and what projects offer the most bang for the buck — especially in your local real estate market. Generally, a more modest redo provides a better return than a deluxe one.

Of course, home value isn’t purely measured in monetary terms. You can tailor the changes to your home by remodeling it according to your family’s tastes and needs. Whether creating a spacious kitchen to accommodate your culinary experiments or perfecting a patio to enjoy the outdoors, you can customize the renovations to suit your lifestyle and desires.

Did you establish a budget and repayment plan before applying for a loan?

It’s also important to carefully budget how much you can afford to borrow and how long it will take to repay the debt. Remember: Renovations almost always take longer and cost more than initially anticipated. Forecasting these numbers can help you make a more informed decision and prevent borrower’s remorse that can occur if you can’t pay your bills.

“Any borrower should sit down and say, ‘What is my own situation? What is my budget? Don’t say that a calculator on a website tells me I can afford it,” says Jon Giles, senior vice president and head of strategy and support for TD Residential Lending. “Look at your budget and say, ‘What am I comfortable with? How quickly do I want to pay down this debt?’ And make sure you’re using those calculators to calculate your own specific scenario in your comfort level.”

Have you shopped around among lenders?

Many lenders in the mortgage industry provide home equity financing, ranging from brick-and-mortar banks to online-only, non-bank institutions. However, availability may vary by state, particularly for HELOCs. While most mortgage lenders offer home equity options, some specialized firms focus solely on home equity financing without offering purchase mortgages.

Explore multiple lenders to secure the most favorable terms. Even a slight variation in the interest rate can result in significant savings over the long term. Taking the time to compare offers from the best HELOC lenders and best home equity loan lenders can save you thousands of dollars in the coming years.

Bottom line

If you’re considering home renovations and need funding, leveraging your home’s equity can be a viable option. But if you have smaller-scale projects planned, it may not be practical to opt for a loan with high minimums and closing costs that requires your home as collateral.

“Friends often ask me if they should tap their home equity for renovation projects,” says Kiran Kaur, CFA and head of credit at Figure, an online home equity lender. “My advice is that if you have the equity, you should explore it. Renovations will likely add value to your home, which will pay off down the road. In the meantime, you get to enjoy your home even more, thanks to the equity you’ve earned.”

Additional reporting by Kevin Payne