Renovating your home can improve its comfort, functionality, and appeal—but major projects can also come with a significant price tag. For homeowners who have built equity, using that equity to help finance renovations may be an option worth considering.

Before borrowing against your home, it’s important to understand your options, costs, and potential risks.

What Is Home Equity?

Home equity is the difference between your home’s current market value and the amount you still owe on your mortgage.

For example, if your home is worth $400,000 and you owe $250,000, you have approximately $150,000 in equity. Equity can grow as you pay down your mortgage or as your home’s value increases.

Ways to Use Home Equity for Renovations

There are several ways homeowners may be able to access their equity.

Home Equity Loan: A home equity loan typically provides a lump sum with a set repayment schedule. This may be a good option when you know approximately how much your renovation will cost.

HELOC: A home equity line of credit allows you to borrow as needed up to an approved limit. This flexibility can be useful when renovation costs are spread over time or may change during the project. HELOCs may have variable interest rates, so understand how rate changes could affect your payments.

Cash-Out Refinance: A cash-out refinance replaces your existing mortgage with a new, larger mortgage and provides the difference in cash. Depending on your current mortgage rate and loan terms, this may or may not be more cost-effective than other options.

What Can You Use Home Equity For?

Home equity financing may be used for many types of improvements, including:

• Kitchen and bathroom remodels
• Basement finishing or room additions
• Roofing, windows, or doors
• HVAC, plumbing, or electrical upgrades
• Landscaping
• Energy-efficiency improvements
• Major repairs and maintenance

Some renovations may increase your home’s value, but there’s no guarantee you’ll recover the full cost when you sell. The potential return depends on factors such as the project, quality of work, and local housing market.

How Much Equity Do You Need?

The amount you may be able to borrow depends on your home’s value, mortgage balance, credit, income, existing debts, and the lender’s loan-to-value requirements.

Having $100,000 in equity doesn’t necessarily mean you can borrow the full $100,000. A lender will evaluate your overall financial situation to determine how much you may qualify to access.

Compare Your Financing Options

Home equity isn’t the only way to finance a renovation. Depending on your project, you could also consider:

• Cash savings: Avoids new debt but reduces your available savings.
• Credit cards: Convenient for smaller purchases but can carry higher interest rates.
• Personal loans: Don’t use your home as collateral, but rates and terms vary.
• Contractor financing: May be convenient, but carefully review the interest rate, fees, and repayment terms.
• Home equity financing: May provide access to funds based on the equity you’ve built.

What Are the Risks?

Home equity loans and HELOCs are secured by your home. If you don’t repay the debt according to the loan terms, your property could be at risk.

You should also consider interest rates, closing costs, fees, and the impact of an additional monthly payment on your budget.

Tips Before Borrowing

Before using home equity for a renovation:

1. Create a detailed budget that includes labor, materials, permits, and unexpected costs.
2. Borrow only what you need to help limit interest costs and monthly payments.
3. Compare financing options based on rates, fees, terms, and total borrowing costs.
4. Consider your long-term plans, especially if you may sell your home soon.
5. Keep an emergency fund rather than putting all available cash into the project.

Is Home Equity Right for Your Renovation?

For homeowners with sufficient equity, using home equity can be one way to finance a major improvement. A home equity loan may work well when you know the amount you need, while a HELOC may provide more flexibility for projects with changing costs.

The best option depends on your home’s value, existing mortgage, financial situation, renovation plans, and long-term goals.

If you’re considering a major home improvement project, exploring your home equity options can help you determine how to finance the renovation while keeping your overall financial plan on track.