Quick Answer: Funding a home renovation using equity means borrowing against the value you’ve built in your home through options like a Home Equity Line of Credit (HELOC), a home equity loan, or a cash-out refinance. HELOCs offer flexible draw periods for ongoing projects, while fixed home equity loans provide a lump sum for planned remodels. Using equity to upgrade high-return areas—such as kitchens, bathrooms, or primary suites—can boost your overall property value while spreading out financing costs.
You have thought of making updates to your home. Maybe, you see that you need kitchen remodelling or a new roof. However, home improvement is expensive. Not everyone has extra cash for this plan. The solution is a renovation refinance if you have built an equity in your home.
You can use home equity to fund renovations. You bought that dream home a while ago. But it is time to give it a fresh look. Take out a home equity loan to renovate your house if you do not have enough cash to fund the renovation project.
Home equity financing
Home equity financing is a method of borrowing. You will gain access to the equity you have built in your property. There is a difference in your current market value of your home and the outstanding balance on your mortgage. The equity grows as your property’s value increases or as paying down your mortgage.
Home equity financing comes in several types. A popular choice is a home equity loan for a renovation. It provides a lump sum to fund a home improvement project. A home equity financing combines the benefits of:
- traditional home loans
- accessing the property’s value
Home equity for renovation versus standard home loan
Homeowners consider using a home equity or they apply for a standard home loan when renovating their property. Both options provide funding for the home project. But they work differently. Homeowners choose the right financing option for the renovation plans once they understand their differences.
Comparison table: Home equity vs. Standard home loan
Feature | Home Equity for Renovation | Standard Home Loan |
| Main purpose | Uses existing home equity to fund renovations | Usually finances the purchase of a property |
| Funding source | Borrowing against the home’s available equity | Funds provided by a lender to purchase a home |
| Eligibility | Requires sufficient home equity and lender approval | Depends on the income, credit history, deposit, and the lender requirements |
| Interest rate | May be fixed or variable, based on the product | It is fixed or variable, depending on the loan |
| Repayment | Depends on the loan structure and repayment terms | Usually repaid through regular instalments over an agreed term |
| Property ownership | Typically available to existing homeowners | Commonly used by people buying a property |
Understanding their differences
Purpose of the loan
Homeowners use the value they have built in their property to pay for improvements through home equity financing. It includes:
- kitchen upgrades
- bathroom renovations
- extensions
- repairs
This is useful for homeowners who need extra funds.
The standard home loan helps buyers to purchase a property. The property serves as security or collateral for the loan.
How does borrowing work
Lenders offer home equity financing by considering the home’s value, including:
- remaining mortgage balance
- borrower’s ability to repay
They check on how much the buyer’s deposit and their income. Most lenders rely on the credit history of the buyer before a home loan is approved.
Choosing the right option
Home equity financing suits homeowners planning home renovations. A standard home loan is better for purchasing properties.
Steps to use home equity for renovations
Plan ahead
Research and create a plan before applying for a loan. You must consider what renovations to make. Do not forget to consider:
- how much they will cost
- equity you have
Shop around for the best rates and terms to reach your financial goals faster. You must plan to:
- Get quotes from contractors
- Get an appraisal of your home’s current value
- Create a realistic and complete budget
- Compare lenders with the best rates and terms
Apply
Apply once you have found your preferred lender and loan type. You must provide information about yourself for your applications.
- Complete name
- Social Security number
- Estimated income
- Employer contact information
Review the loan terms before signing.
Receive the loan
Begin the closing process after the loan is approved.
- The lender will send a closing date with instructions.
- Sign all loan documents and lender disclosures
- The funds are issued as a lump-sum payment
Repay the loan
The home equity loan must be repaid on the due date.
Benefits of using a home equity loan to renovate
Increase property value
Home improvements boost your home’s appeal and marketability. This increases your return on investment (ROI).
Improve living spaces
Upgrade high-traffic areas to improve their functionality. Make needed repairs to live comfortably in your home. Make repairs to:
- roofing
- plumbing
- windows
- central cooling and heating
Lower interest rates
Home equity loans offer lower interest rates.
FAQs
Is applying for a home equity loan fast?
Yes. A home equity loan is faster compared to a standard home loan. Some lenders quickly approve equity loans for those with a good credit history.
Is getting a home equity loan a wise decision?
A home renovation will increase the value of your home. Plus, it saves you from energy bills.
Why is a home equity loan has faster approval than the standard home loan?
A home equity loan is considered your credit record. Once you have a good credit history and a good income, the chances of getting approved are higher.
