How to use HELOCs and home equity loans for home improvements

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See our Advertiser Disclosure.Aly J. Yale · Freelance writerUpdated Tue, October 7, 2025 at 6:14 PM GMT+2 7 min readHome equity can be a helpful way to pay for home repairs, renovations, or improvements. Not only do home equity loans and lines of credit typically come with lower interest rates than other forms of borrowing, but they also come in fairly large loan amounts (usually up to 80% of your equity). You could also earn a valuable tax deduction with these products. Still, every homeowner should understand the process and its pros and cons before taking equity out of their house to pay for home improvements.This embedded content is not available in your region.Learn more: The best home equity loan lendersHome equity is the portion of your house’s value you actually own. To calculate yours, you take the value of your home and subtract your outstanding mortgage balance. That’s your home equity stake.Let’s say you own a $400,000 home and still owe $300,000 on your mortgage loan. Here’s how to determine how much equity you have:$400,000 - $300,000 = $100,000.You have $100,000 in equity.$100,000 is 25% of $400,000, so you have 25% equity in your home.You build home equity every time you make a mortgage payment because you are paying down your loan balance. Your equity also increases when your home gains value (or decreases if your home loses value).Read more: How to use home equity to build wealthWhen you build up enough equity, you have a few options for tapping into it. You can use money from the following financial products for any purpose, but many borrowers put the money toward home improvement projects and major renovations.Here are your main financing options for putting your home equity toward home improvements.In some ways, home equity loans work similarly to traditional mortgages. You get an up-front lump sum, and then you repay the balance monthly over an extended period of time, such as 30 years.Home equity loans tend to have fixed interest rates. This is ideal if you have one or two main home improvement projects, know how much money you need, and want to use the cash all at once. It’s also good if you want fixed, predictable payments.Because they’re lines of credit, HELOCs work more like credit cards. You can withdraw money from the allotted amount during the draw period, which typically lasts 10 years. You’ll usually only make interest payments during this time.HELOC lenders often charge variable interest rates, meaning the rate can rise or fall over the loan term. Make sure you can handle the changing interest rate and payments that come with a HELOC.Because you take out money as you need it, HELOCs can be ideal if you have several ongoing improvement projects or aren’t sure how much a renovation project will cost up front.Home equity sharing contracts allow you to sell a portion of your home’s future value to investors in exchange for a lump sum. You don’t have to pay interest or make monthly payments, but you do have to pay off the balance — plus a portion of your home’s appreciation when your term ends or you sell the home.Home equity sharing can benefit homeowners whose credit scores are too low to qualify for home equity loans or HELOCs. However, it is only available in certain markets where home equity investing companies operate. Some examples of these companies include Unison, Hometap, and Point.Learn more: How to tap into home equity with a second mortgageUp NextIs interest paid on a HELOC tax deductible?What do you need to qualify for a home equity loan? Here are the requirements.Is now a good time to take out a HELOC?Home equity is often a good way to pay for home improvements, but it’s not always the right answer. If you’re considering putting your home equity toward repairs or home projects, weigh these pros and cons first.Potential tax deduction. If you use your home equity funds to “buy, build, or substantially improve” your home, you can deduct the interest from your loan on your annual tax return.Lower interest rate than other options. HELOCs and home equity loans tend to have much lower interest rates than other borrowing options you might be considering, including credit cards and personal loans.It could improve your home value. Depending on what improvements you make, you could increase your home value. This could lead to higher profits when you sell.Large loan amounts. Many lenders will let you borrow up to 80% of your home equity (sometimes even 90%). If you’ve paid down a substantial percentage of your debt, this could amount to a pretty hefty sum.Puts your home at risk. Home equity loans and HELOCs are secured loans, meaning they use your home as collateral, so if you fail to make payments, your lender could foreclose on your house. Unsecured debts, such as credit cards, don’t put your real assets in jeopardy.Reduces your equity. Taking out a HELOC or home equity loan lessens how much equity you have in your home. Should your property lose value later, you could end up owing more on the home than it’s worth. This could result in selling your home at a loss.It may come with closing costs and fees. As with your original mortgage, you’ll typically need to pay various closing costs and fees when you use a home equity product. Make sure to shop around for HELOC and home equity loan lenders to find ones that charge fewer fees.Need lots of equity to qualify. You will usually need at least 20% equity in your home to qualify for a home equity loan or HELOC. So, on a $300,000 house, your mortgage balance when applying should be no more than $240,000.If you’re not sure whether the pros outweigh the cons in your situation, talk to a professional. A mortgage broker, loan officer, or financial planner can help you make the right decision for your goals and budget.This embedded content is not available in your region.Borrowing against your home equity to pay for improvements can be a smart move, as long as you borrow only what you need and can afford to cover the monthly payments. Failing to make payments on a home equity loan or HELOC could lead to foreclosure — meaning you’d lose your house.Two of the best types of loans for home renovations are home equity loans and HELOCs. Home equity sharing agreements may also be an option, depending on where you live. All three let you take equity out of your house, which you can use for home improvements.The difference lies in how you receive the money. With a home equity loan, you’d get $50,000 up front and pay interest on that entire amount. A $50,000 HELOC, on the other hand, functions more like a credit card. You can withdraw as much (or as little) as you like from that $50,000 over a set period of time, and you’ll only pay interest on what you take out.A HELOC can be a good option for home improvements, as it allows you to withdraw money over an extended period of time. If you need to buy materials or pay a contractor invoice, for example, you can withdraw funds from your HELOC to cover those as needed. HELOCs usually have draw periods of 10 years and repayment periods of 20 years.Laura Grace Tarpley edited this article.