How to Use a Home Equity Loan for Renovations

If it's time to renovate your home, then borrowing money against the equity you have built up is a way to pay for it. Home equity loans generally come with lower interest rates when compared to other types of personal loans. And in many cases the interest is tax deductible which will help you lower your taxable income. But before you pursue the financing, determine what your needs really are.

Difficulty: Moderate

Instructions

1. Determine how much equity you have in your home so you can get an idea how much money you have to spend on the renovations. Subtract the amount of money you owe on your house from the estimated value of the home. The difference is the amount of equity you have to work with.

2. Decide if you will be doing the renovations all at once or a little at a time. If you're doing some of the work yourself or it will be done in several phases, a revolving equity line of credit may make more sense than a fixed term loan. That way you're only paying interest on the amount of the loan you're using at the time.

3. Apply for the equity loan and include a copy of the renovation plans. Depending on the type of remodel you're doing, it could increase the value of the home and your lender can consider that when determining how much money they're willing to lend.

4. Shop contractors to compare costs and expertise. Let them know you're arranging your own financing and decline any offers by them to handle the financing for you.

5. Close on your home equity loan once you have your final plans and costs in place. Then start your renovations and let the transformation begin.

Tips & Warnings

• Decline any offers from contractors who want to handle the financing for you. They're just acting as a middle man between you and the bank which means you'll be paying them commissions and higher interest rates than if you just did it yourself. That money is much better spent on the actual remodel.
• Shop around for the best home equity loan deals. Banks vary widely on the products and rates they offer so it definitely pays to shop.