Using Home Equity for Renovations & Home Improvements [2026]

Why Home Equity for Renovations?

Cost Comparison: Financing Options

*Rates vary based on credit, market conditions, and lender. For illustration only.

Key Advantages

• Lower interest rates: Secured by home equity
• Tax deductibility: Interest may be deductible for qualifying improvements
• Larger amounts available: Access significant funds for major projects
• Value reinvestment: Money goes back into your home

Choosing the Right Product for Your Project

HELOC: Best for Phased or Uncertain Projects

A Home Equity Line of Credit provides flexible access to funds as needed.

• How it works: Draw funds as needed during 10-year draw period
• Interest: Only pay on what you draw
• Rate: Variable (changes with market)

Best for:

• Multi-phase renovation projects
• Uncertain total cost (discoveries during renovation)
• Ongoing home maintenance needs
• DIY projects with gradual spending

HELOAN: Best for Defined Budget Projects

A Home Equity Loan provides a fixed lump sum with fixed payments.

• How it works: Receive full amount at closing
• Interest: Pay on full amount from day one
• Rate: Fixed for life of loan

Best for:

• Single major project with contractor quote
• Known total cost (kitchen remodel, addition)
• Those who want payment predictability
• Projects starting immediately

Cash-Out Refinance: Best for Large Projects + Rate Improvement

Replace your existing mortgage with a larger one and take the difference as cash.

• How it works: New mortgage pays off old, you get difference
• Interest: One payment for mortgage + renovation funds
• Rate: Typically fixed

Best for:

• Large renovation budgets ($100K+)
• When you can also improve your mortgage rate
• Simplifying to one payment
• Major projects like additions or whole-home renovation

Home Improvement ROI: Which Projects Add Value

Not all renovations are equal. Focus on projects that return value.

High ROI Projects (60-80%+ Cost Recovery)

Moderate ROI Projects (40-60% Cost Recovery)

• Major kitchen remodel (high-end): 50-60%
• Deck addition: 50-65%
• Master suite addition: 50-60%
• Roof replacement: 55-65%

Lower ROI but High Enjoyment

• Swimming pool: 30-50%
• Luxury bathroom: 40-55%
• Home office addition: 40-55%
• Basement finishing: 50-60%

ROI Isn't Everything

Don't renovate purely for ROI. Consider:

• Enjoyment: Will you love the improvement while living there?
• Functionality: Does it solve a real problem?
• Time horizon: How long will you enjoy it before selling?
• Neighborhood: Does it fit the area's price range?

Tax Benefits of Home Equity for Renovations

The Tax Deduction Opportunity

Interest on home equity debt may be tax deductible when funds are used to "buy, build, or substantially improve" your home.

Qualifying Improvements

• Room additions
• Kitchen and bathroom remodels
• New roof
• HVAC replacement
• Structural improvements
• Built-in appliances
• Swimming pool (permanent)
• Landscaping (permanent improvements)

Non-Qualifying Uses

• Debt consolidation
• Tuition payments
• Car purchases
• Vacations
• General living expenses

Important Limits

• Combined mortgage debt limit: $750,000 ($375,000 married filing separately)
• Must itemize deductions (not take standard deduction)
• Keep records of how funds were used
• Consult tax advisor for your specific situation

How Much Can You Borrow?

The Equity Calculation

Example

Renovation Financing Checklist

Before Applying

1. Define your project scope - What exactly are you doing?
2. Get contractor estimates - Know your realistic budget
3. Add contingency (15-20%) - Renovations often cost more than expected
4. Check your equity position - How much can you access?
5. Review your credit - Better credit = better terms
6. Compare product options - HELOC vs HELOAN vs cash-out

Questions to Answer

• Is your project phased or single-phase?
• Do you know the exact total cost?
• Would you benefit from refinancing your first mortgage?
• Do you prefer fixed or variable payments?
• How long until you might sell the home?

Common Mistakes to Avoid

Mistake #1: Underestimating Costs

Renovation costs almost always exceed initial estimates. Always add 15-20% contingency.

Mistake #2: Over-Improving for the Neighborhood

A $200,000 kitchen in a $400,000 home neighborhood won't return value. Match improvements to area standards.

Mistake #3: Taking More Than Needed

With a lump sum (HELOAN or cash-out), you pay interest on the full amount. Don't borrow extra "just in case."

Mistake #4: Ignoring Carrying Costs

During renovation, you may have:

• Mortgage payment
• HELOC/HELOAN payment
• Temporary housing costs
• Storage fees

Mistake #5: DIY Beyond Your Skills

Poor DIY work can reduce value rather than add it. Know your limits.

The Process: Renovation Financing Timeline

Get Started

Ready to finance your renovation? Comparing HELOC, HELOAN, and cash-out refinance options with a mortgage broker ensures you find the best fit for your project scope, timeline, and budget.