Benefits of Using a Home Equity Loan to Remodel

If –– like many homeowners –– you’ve been in your current home for a while and are ready for something new, you might be contemplating whether it’s time to pack up your things and move on to greener pastures (or just down the street.) But while browsing on Zillow with reckless abandon can be a good way to pass the time, seeing inflated housing prices and consistently high-interest rates can be a hard-hitting reality check. Not to mention the closing costs you'll most likely have to cover if you decide to sell your home and buy another.

So, maybe moving is out for now, but while you wait for the market to cool off, you can still enjoy a change of scenery by putting on your imaginary hard hat and tackling a home remodeling project.  Throw a new coat of paint on the walls and switch out some knobs, or go all in and turn your backyard into a zen garden: how you breathe new life into your existing space is up to you! 

How you pay for these add-ons is also up to you, but we admit that this detail is less fun to fantasize about. There’s the cash option, but freeing up tens of thousands of dollars in cash for home renovation projects is likely out of the question for many homeowners. You could also charge it on a credit card, but huge expenses + sky-high interest = an equation we’re less than optimistic about. But for qualifying homeowners, there’s a third financing option, and it might just be the right one: a home equity loan remodel. 

What is a home equity loan? How does it work? And how can it turn my dream home into a reality? Below, the team at Truehold explains how to use a home equity loan to remodel and why this tool is one of the best ways to finance your remodel. 

Home Equity Loans, Explained

Before we discuss using this loan option to tackle a home improvement project, what is home equity and how can you take out a loan from it? Your home equity refers to the amount you owe on your home loan subtracted from the home’s value –– which, if you’ve lived in your home for long enough to be ready for a change, can be a tidy sum. A home equity loan is issued by a lender against this equity, which comes as a lump sum and is then repaid at a fixed interest rate. Home equity loans are sometimes called “second mortgages,” as your monthly payment is in addition to your primary mortgage. 

What makes home equity loans so great for covering home remodels is their versatility: This lump sum can be used for just about anything you can think of. This can hurt some homeowners, who access their home equity to cover unnecessary lifestyle purchases or as a last-ditch effort during times of economic hardship. Remodeling, on the other hand, can increase the home’s value, with home equity loans effectively allowing homeowners to reinvest in their home’s future. 

Home Equity Loans vs HELOCs for Remodeling

While we mentioned cash payments and credit cards as ways homeowners can subsidize home remodels, there was one tool we failed to mention. A home equity line of credit, or HELOC, functions similar to a credit card in that you can access as much as you need up to your credit limit –– except instead of accessing credit set by a lender, you’re borrowing against your available home equity. HELOCs are a popular alternative to home equity loans, so let’s analyze how the two compare when used for a remodel. 

Interest Rates

One of the biggest differences between home equity loans and HELOCs lies in their respective interest rates. HELOCs feature variable interest rates, meaning that these rates may fluctuate, leading to unexpected increases in monthly payments and a potentially far higher final repayment total. 

Home equity loans, on the other hand, operate on fixed rates, so borrowers know exactly what they’re getting into when they take out their loans. Considering the national average remodel cost is just shy of $50,000, a single-percent interest change can make a huge difference.¹ You'll have an even better advantage in securing the best home equity loan rate if you have a credit score of 700 or higher.² 

Repayment

A home equity loan option and a HELOC may have similar repayment timelines, up to 30 years in some cases, but their biggest difference lies in the HELOC’s “draw” period. During this time, homeowners can borrow as much as needed –– whenever they want –– up to their set limit. Only interest payments are required during this draw period, but once the term ends, payment principals are due, which could send the total payment amount surging. With home equity loans, there is no draw period, so this payment remains the same throughout the repayment period. 

Long-Term Impact

With both a home equity loan and a home equity line of credit, the bottom line is that homeowners are taking on additional debt. But the potential impact of this debt is what distinguishes the two. HELOCs allow for near-constant spending during the draw period, which can be a slippery slope — especially regarding home improvements and remodels. Whereas you might start the project on budget, the freedom of a draw period may entice some to spend more just because they can. The lump sum of a home equity loan, on the other hand, can act like a limiter, preventing homeowners from biting off more than they can chew. 

Although home equity loans and HELOCs may be similar, for the purpose of remodeling you may find that home equity loans are the better financing option. This is primarily due to their consistent interest rates and fixed monthly payment options, and the security a lump-sum payment can provide.  

Sell and Stay Transactions for a Remodel vs HELOCs and Home Equity Loans

If you’re looking for a way to remodel your home, but don’t want to worry about interest rates or repayment timelines, sell and stay transactions are a great choice. Through a sell and stay transaction, you can choose to sell your home and live in it as a renter. This type of agreement allows you to unlock your equity and use that money to help fund certain projects, such as a home remodel. Plus, you won’t need to worry about any future pitfalls, such as looming loan payments or interest rates.

The Final Word from Truehold

While maxing out a credit card or draining your savings can help you make your home improvement and remodeling dreams come true, you’ll likely recognize that a home equity loan for a remodel can be a far better way to accomplish the same goal. With that said, both a home equity loan and a home equity line of credit can be a great way to access some of equity to breathe new life into your space –– and drive up its resale value in the process!  

But, through a sell and stayt transaction, you'll sell your home at a competitive price so you can unlock your equity. Then, you can continue to live in the home you know and love as a renter, and leave the property insurance and essential repairs to us. 

Ready to learn more about unlocking your equity? Learn more today. 

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Sources:

1. Architectural Digest. How Much Does It Cost to Renovate a House?  https://www.architecturaldigest.com/story/cost-to-renovate-a-house 

2. Nerdwallet. Home Equity Loan Rates: Compare Top Lenders in May 2023.  https://www.nerdwallet.com/mortgages/mortgage-rates/home-equity-loans