Home Equity Loan For Remodel: How It Works

Pros Of Using A Home Equity Loan For Your Remodel

There are several benefits to relying on a home equity loan to pay for your home’s remodel. Here are some of the top advantages:

Low Interest Rates

You’ll generally pay lower mortgage rates when you take out a home equity loan. That’s 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 your lender more protection and the freedom to attach a lower interest rate to your loan.

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

Tax Benefits

The interest you pay on a home equity loan can be tax deductible, bringing you savings come income tax time. To qualify for the mortgage interest deduction, you must use your home equity loan to buy, build or substantially improve your home. Using your home equity loan funds to pay for a home remodeling or renovation will qualify. If you use your home equity loan, though, to pay off high-interest-rate credit card debt or pay for a child’s college tuition, you can’t 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 $300,000 primary mortgage and an $80,000 home equity loan, then, you’ll be able to deduct all the interest you pay on these loans during the year. You must itemize on your taxes to claim the mortgage interest deduction. You can’t claim this if you instead take the standard deduction available to all taxpayers.

Upfront Lump Sum

When you take out a home equity loan, you’ll receive your funds in a single lump-sum payment. This gives you the freedom to use those funds immediately and on whatever home renovation or remodeling project you choose.

Return On Investment

Depending on how you spend your home equity loan dollars, you can increase the value of your home, which will pay off when it’s time to sell. Kitchen remodels, for example, generally help boost the value of your home. Adding an extra bedroom or building a primary bathroom can increase the value of your residence, too.

Long Payback Period

You also have flexibility in choosing a loan term. You might choose a shorter-term home equity loan, such as 5 years, if you want to repay your loan quickly and spend the least amount of interest. But you can stretch out your loan term – to, say, 10 or 15 years – if you want a smaller monthly payment. Just know that the longer your loan’s term, the more you’ll pay in interest during the life of that loan.