Paying for Your Home Improvement Projects

Updated: February 21, 2024

Thinking about tackling those home improvement projects you’ve been eyeing for a while? Maybe you want to upgrade your kitchen, replace outdated fixtures, or turn a closet into a new office space. As you go down your list of home improvement projects and begin calculating the cost, you might be wondering how you’re going to pay for everything.

Home improvement costs can quickly add up, and it can take a long time to save up the funds to cover the costs if you don't have money already tucked away in a savings account. However, the equity you’ve built up in your home since you’ve owned it might be able to help. Home equity is the difference between what you owe on your mortgage and the home’s current market value. Here are a few options that would allow you to use your home’s equity to help finance your next home improvement project.

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows you to borrow from your home’s equity. It has a variable interest rate and works similar to how a credit card works, only secured by your home. 

Pros

• Flexibility: draw on the credit line as needed, to cover costs even unrelated to home improvement, like an unexpected medical expense or an educational loan.
• Low Interest Rates: a HELOC typically has a lower interest rate compared to a credit card.¹ The interest you pay may also be tax-deductible, depending on how you use the funds.²
• Easy Access to Funds: once you are approved for a HELOC, you can quickly access funds by writing a check or using a debit card.
• Ability to Borrow Large Amounts: a HELOC is a secured loan, backed by the equity in your home. This allows you to borrow larger amounts of money than you would be able to with an unsecured loan.

Cons

• Variable Interest Rates: Your HELOC will have a variable interest rate, which means it can fluctuate over time. This can make it difficult to predict your monthly payments.
• Risk of Foreclosure: Because a HELOC is secured by your home, falling behind on payments can put your home at risk of foreclosure.
• Home Value Decrease: If the value of your home decreases, you may end up owing more than what your home is worth.
• Temptation to Overspend: The flexibility of a revolving line of credit may make it tempting to overspend and accumulate more debt than you can afford to repay.

Home Equity Loan

A Home Equity Loan is an installment loan paid out in a lump sum at the beginning of the loan. This loan is often referred to as a second mortgage. The Home Equity Loan has a fixed interest rate and fixed monthly payments. 

Pros

• Fixed Rates: a fixed interest rate means your monthly payments remain the same for the life of the loan.
• Tax-Deductible Interest:  if you use the funds from a Home Equity Loan to make home improvements, the interest you pay may be tax-deductible.²
• Ability to Borrow Large Amounts: with a Home Equity Loan, you'll be able to knock out a large expense all at once, even if it's not related to home improvement.
• Lower Closing Costs: closing costs may vary, but are typically lower compared to a Cash-Out Refinance.

Cons

• Inflexibility: a Home Equity Loan provides a lump sum of money, which can make it difficult to access additional funds if you need them.
• Higher Interest Rate: the interest rate for a Home Equity Loan may be higher than that of a HELOC.
• Closing Time: Home Equity Loans typically take longer to process and close compared to a personal loan. 
  
  

Cash-out Refinance

Cash-out refinance is another option for funding your home improvements. A cash-out refinance allows you to refinance your current mortgage and get cash out to cover other expenses you might have. The funds you’re able to get will depend on how much equity you have in your home and other lender requirements. This option may be good to consider if you can secure a lower interest rate than your current mortgage rate.

Pros

• No restrictions: you’re not limited to how you can use the funds. You could use them for home renovations, debt consolidation, vacation, etc.
• Potential lower interest rate: cash-out refinancing allows you to take advantage of potentially lower interest rates than you are currently paying on your existing mortgage.
• Fixed monthly payment: cash-out refinancing is easy to fit into your monthly budget.

Cons

• Closing Costs: closing costs and other fees could range from 2% to 5% of the mortgage, making this option more expensive than a Home Equity Loan or a HELOC.
• Inflexibility: this option replaces your existing mortgage with a new mortgage, making it it difficult to access additional funds if you need them, and potentially extending the time frame for paying it off.
• The new mortgage will have different terms. Be sure you understand the new terms (interest rate and fees) before you agree to the loan.

Most Common Home Improvement Projects

Home improvements can increase the value of your home. If you’re trying to decide where to start, consider projects that could potentially give you the best bang for your buck. Some common projects people use their home’s equity for include:

Kitchen renovation:

Giving your kitchen an updated look with new energy-efficient appliances, updated countertop, new hardware for cabinets, updated sink, and new flooring could cost around $35,300.³

Bathroom remodel:

Updating your bathroom with a new vanity, toilet, faucet, tub/shower, and flooring averages $13,400.

Roof Replacement:

Replacing a roof costs on average $9,300.

New deck:

Building a new deck could cost around $8,000.

Window replacements:

Replacing your windows could give your home a refreshed look and save you on energy costs. The cost typically run around $9,000.

There are several options to finance your home improvement projects using your home’s equity. Choosing the best option that meets your needs and budget will get you closer to enjoying your home while increasing its value.

¹ When compared to the average credit card rate in the U.S. of 20.4%, according to The Federal Reserve, February 2023 data. 

² Consult your tax advisor for any tax deductions, benefits, or other potential tax benefits regarding this type of loan.

³ Home repair estimates and average costs provided in this article were from Homeadvisor, Inc. © 2021. All rights reserved. AllSouth strives to keep its information accurate and up to date.