The Pros and Cons of Using a Home Equity Loan to Fund Home Improvements

The Pros and Cons of Using a Home Equity Loan to Fund Home Improvements

A home should be a relaxing place, but it’s hard to be comfortable living in an outdated house that requires significant upgrades. If you feel inconvenienced at your own house, it’s best to invest in home upgrades. Your home improvements can range from functional upgrades like improving the plumbing or the electric system to aesthetic upgrades like getting and maintaining a garden or lawn.

However, more home improvement projects are expensive, and you may find it challenging to afford them on your salary. By the time you save enough money, your house can be in a worse condition, and the upgrades can get more expensive. Many people take out home equity loans to fund their home improvement projects. In this article, we’ll discuss these loans in detail.

What Are Home Equity Loans?

Home equity loans use your house’s equity as collateral. This means you can take out a loan worth your house’s value, but you create a lien against your house. The lender can repossess your house if you cannot repay your debt. Due to this, only take out a home equity loan if you can repay it according to the negotiated terms.

The amount you get from these loans is significant, as your house’s value determines it. Due to this, home equity loans are also called second mortgages, and people use them to fund expensive projects, like home improvements or paying medical bills. You generally require a good credit score to get a home equity loan, and you can get one from reputable websites like If you are unsure about taking out a home equity loan to fund your home improvement project, let us help. Here are the benefits and drawbacks of doing so:

The Pros of Home Equity Loans for Home Improvement

Home equity loans are an excellent option to fund your home improvement projects for several reasons:

1. Access to a Larger Sum of Money

Home improvements are expensive and require significant savings or a huge loan. Home equity loans provide the required funds if you do not have enough savings. The amount of money you get from a home equity loan depends upon your house’s value. Houses are expensive, which means you can borrow significant money, enough to fund your improvements. The exact sum depends on your equity: you can calculate it by subtracting the mortgages you still have to pay from your house’s value. Your equity increases as you clear up your mortgage payments, and you can borrow up to 80% of the total equity. 

2. Lower Interest Rates

Home equity loans are secured, reducing the lender’s risk. This means you can get home equity loans at a lower interest rate compared to other loans, like personal loans. If you default on the loan, the lender can recoup their losses by seizing your house. Lenders can offer these loans at lesser interest rates. Home equity loans are also usually stable, and the interest rate does not change over time. So you can plan your payments without any uncertainty.

3. Tax Benefits

If you utilize your home equity loan to make improvements on your property, you have some tax benefits. Home equity loans are tax-deductible through the Smith Maneuver if you write them off as an investment to improve your home substantially; you will not get tax benefits if you use your loan for other purposes.

You should note that the rules around tax benefits are complex. It’s best to consult a tax professional to check your eligibility for the benefits. If you wish to claim the benefits, keep all your records and receipts to prove to the tax authorities that you used the money for home improvements.

4. Longer Repayment Terms

A significant benefit of home equity loans for funding home improvements is that they have longer repayment terms. As the cost is spread out, you owe a lower sum every month, making them convenient to pay off.

Since the lender has your house’s equity as collateral, they are more confident about the loan and allow longer repayment terms. On average, you can pay a home equity loan over five to 30 years. However, longer repayment terms also mean you will pay more interest. The interest accrues over time, and sometimes, you may have to pay back more interest than the principal amount.

Cons of Home Equity Loans for Home Improvements

Despite the several benefits of home equity loans, there are some drawbacks you must keep in mind:

1. Your Home Is At Risk

When taking out a home equity loan, remember that your ownership of your home can be taken from you if you default. Ensure you have the means to pay back your loan in full, or you can face foreclosure. This can be a problem if you are already struggling to make ends meet or face an emergency during the repayment time that renders you unable to repay the loan in full. Don’t take out home equity loans unnecessarily, and make a strict repayment plan if you do to avoid losing ownership of your home.

2. High Closing Costs

Home equity loans can be expensive. While the interest rates are lower, fine print costs can add up to be a lot. These include application fees, origination fees, appraisal fees, and other closing costs. These expenses can make home equity loans more expensive than other funding options. The longer repayment time means you pay more interest on home equity loans than on other loans. Always read the fine print carefully and research options with lower closing costs.

3. Potential for Overspending

Home equity loans allow you to borrow against your house’s equity, which puts more funds at your disposal than you need. You can end up deciding on more expensive renovations than required and taking out a larger loan. You can find it challenging to pay back the excess loan over time. When deciding on home improvements, make a clear budget and stick to it. Don’t take out a larger loan than needed, even if it can be approved.


Home equity loans are a common way to fund home improvements. They put your house’s equity as collateral and allow you to take out large loans at lower interest rates. In some areas, your loan may be tax deductible. You also benefit from longer repayment terms as they spread out your repayments over several years.

However, they put your home at risk, have higher closing costs than other loans, and can make you overspend. Budget your improvement costs and consider all pros and cons before taking out a home equity loan.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.