Using a Home Equity Loan for Renovations and More

Big expenses come at us throughout our lives, sometimes unexpectedly, sometimes planned. Regardless of the circumstance, you’ll need a way to finance these major purchases when they arise. If you own a home, your best course of action may be to do so with a home equity loan.

Home equity loans allow you to use your house as collateral and you can use the money for anything you like. Many people take out home equity loans to finance renovation projects that make their property more valuable.

What Are Home Equity Loans?

Also known as a second mortgage, a home equity loan allows homeowners borrow money against the value of their home.

Home equity is calculated by taking the current value of your residence and subtracting your outstanding mortgage balance. For example, if your house is currently estimated to be worth $500,000 and you still owe $100,000 on your mortgage, then you have $400,000 in home equity. Your loan will be borrowed against this total. Typically, most lenders will allow you to borrower up to 80% of the value of your property minus the first mortgage balance.

Home equity loans usually come with fixed rates. This means that home equity loans will be less expensive over the lifetime of the loan than financing your large expense via credit cards or other loan types. You may also be able to deduct the home equity loan interest payments from your taxes. We recommend consulting a tax advisor for personal tax guidance.

There is some risk involved. If you are unable to pay back the loan, the lender could choose to foreclose on your house. Therefore, you’ll want to be on sound financial footing before taking one out.

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How Do Home Equity Loans Work?

Your home equity loan will be paid out in a single lump sum. This comes with its own pros and cons. On the bright side, you’ll have access to all the funds you need right away. But, since you’re not borrowing money as you need it, you’ll have to have a very good estimate of how much money you need to borrow from the start. If your home renovation project costs less than the amount borrowed, you’ll still need to repay the entirety of the loan, usually in monthly installments that begin soon after the money is available.

If you’re unsure of how much money you will need, you may want to consider a home equity line of credit (HELOC). Just like a home equity loan, a HELOC allows you to borrow against the equity in your home. But instead of receiving all the funds upfront, you can withdraw money as you need it. HELOCs function much like a credit card in that once you reach your credit cap, your balance will need to be repaid before you can withdraw more money.

What Can Home Equity Loans Be Used For?

Home equity loans do not need to be used on your home. The money can be spent on any big expense you need help financing, such as a wedding or business startup. One popular use for them is paying off credit card debt. Credit card interest rates are notoriously high. Paying off your credit card debt with funds from a low-rate home equity loan could save you a significant amount of money in the long term. It will also help consolidate your debt if you owe money on more than one credit card by allowing you to make just one payment every month.

Although funds from a home equity loan can be used for anything, it’s important to note that interest from these loans is only tax deductible if the funds are used on a home renovation project. Consult a tax advisor to see if your project is eligible.

(Note: The interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for federal income tax purposes. Consult your tax advisor regarding the tax deductibility of interest.)

There’s another convincing argument for using the loan on your home: it is a great return on investment. If you use the funds to add an extra bedroom, remodel the kitchen or install a pool in the backyard, you’re increasing the value of your property, which you will own entirely once your mortgage is paid off.

Let AAA help finance your project with a low-rate home equity loan.

Renovations Worth the Money

So, which home equity loan renovations should you consider if you’d like to increase the value of your home? According to the National Association of Realtors’ (NAR) 2025 Remodeling Impact Report, these interior projects provided the best bang for their buck.

• 100%* — New steel front door
• 83%* — Closet renovation
• 80%* — New fiberglass front door
• 74%* — New vinyl windows
• 71%* — New wood windows

*of project cost recovered at house resale.

And these were the projects that gave homeowners the most joy. NAR calculated the joy score based on how happy homeowners were when the work was completed. Ten was the highest score.

• Added primary bedroom suite — 10
• Kitchen upgrade —10
• New roofing —10
• Bathroom renovation — 9.8
• Complete kitchen renovation — 9.7

Have you used a home equity loan to make home renovations? Tell us in the comments.