- American homeowners currently hold a record $34 trillion in home equity, making it an accessible funding source for renovations.
- HELOCs and home equity loans typically offer much lower interest rates than personal loans or credit cards.
- The average HELOC rate is around 7.10% as of May 2026 — far below the average credit card rate of roughly 20%.
- Interest paid on home equity funds used for home improvements may be tax-deductible on the first $750,000 of combined home loan debt.
- Kitchen remodels, bathroom updates, and energy-efficient upgrades consistently deliver strong returns on investment.
Table of Contents
- What Is Home Equity?
- Why Use Home Equity for Improvements?
- Your Home Equity Financing Options
- Which Home Improvements Add the Most Value?
- Tax Benefits to Know
- Risks to Consider Before You Borrow
- How to Qualify and Apply
- Frequently Asked Questions
What Is Home Equity?
Home equity is the difference between your home’s current market value and what you still owe on your mortgage. If your home is worth $400,000 and you have a $250,000 mortgage balance, you have $150,000 in equity. As you make payments and as your home appreciates, that number grows.
Right now is a particularly strong moment for homeowners. According to the Federal Reserve, American homeowners hold roughly $34 trillion in total home equity — the highest level ever recorded. That’s a massive pool of wealth that many homeowners can tap without selling or refinancing their primary mortgage.
Why Use Home Equity for Improvements?
Funding renovations with home equity is one of the smartest financial moves available to homeowners. Here’s why it makes sense:
Lower interest rates than alternatives
As of May 2026, the average HELOC rate is around 7.10%, and fixed home equity loan rates are near 7.37%. Compare that to average credit card rates hovering near 20% or personal loans averaging around 12%. Using equity dramatically reduces your borrowing costs.
You’re investing in your own asset
When you use your home’s value to improve your home, you’re essentially reinvesting in the same asset. The right projects can boost your home’s market value, which may exceed the cost of the renovation itself.
You keep your existing mortgage rate
Many homeowners locked in low mortgage rates in 2020 or 2021 and are reluctant to refinance. A HELOC or home equity loan lets you access your equity without touching your first mortgage, preserving that rate.
Flexible access to funds
With a HELOC in particular, you draw only what you need, when you need it. This is ideal for multi-phase renovation projects where costs roll in over months.
Your Home Equity Financing Options
There are two primary ways to tap your home equity for renovations. Here’s how they compare:
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Rate type | Variable (usually) | Fixed |
| How funds are received | Draw as needed (credit line) | Lump sum |
| Best for | Ongoing or phased projects | Single large project |
| Average rate (May 2026) | ~7.10% APR | ~7.37% APR |
| Repayment | Draw period + repayment period | Fixed monthly payments |
Love Your Rate? Keep It — Tap Equity Without Refinancing
A HELOC lets you fund repairs, upgrades, or improvements using your home’s equity — without touching your existing mortgage rate.
HELOC (Home Equity Line of Credit)
A HELOC works like a credit card secured by your home. You’re approved for a maximum line of credit, and during the draw period (typically 10 years) you can borrow and repay repeatedly. You only pay interest on what you actually use. This makes it ideal for kitchen remodels or addition projects where expenses are spread over time. For a deeper look at how these work, see our complete HELOC guide.
Home Equity Loan
A home equity loan gives you a single lump sum at a fixed interest rate. Your monthly payment stays the same for the life of the loan, making budgeting straightforward. This works best when you have a well-defined project with a predictable cost — like a bathroom remodel or roof replacement. You can compare HELOC vs. home equity loan vs. cash-out refinance options in our side-by-side guide.
Want to see what you might qualify for? Use our HELOC calculator to estimate your borrowing potential.
Which Home Improvements Add the Most Value?
Not every renovation returns equal value. The National Association of Realtors’ Remodeling Impact Report consistently tracks which projects pay off most when homes sell. Here’s a summary of high-ROI improvements:
- Kitchen renovation: A minor kitchen remodel often recoups 80% or more of its cost. Updating appliances, countertops, and cabinets without a full gut renovation delivers strong value.
- Bathroom remodel: Updated fixtures, vanities, and tile consistently appeal to buyers and add measurable value.
- Finished basement: Converting unused basement space into livable square footage can recoup roughly 71% of costs, according to NAR data.
- Deck or outdoor living area: Curb appeal and outdoor functionality remain highly valued, especially after years of increased time spent at home.
- Energy-efficient upgrades: New windows, insulation, and HVAC systems reduce utility bills and appeal to eco-conscious buyers. Note that some federal energy credits have changed — check IRS guidance on home energy credits for current eligibility.
- Roof replacement: Though unglamorous, a new roof is a selling point and protects your entire investment.
Projects that primarily improve your personal enjoyment — like adding a pool or luxury home theater — tend to have lower resale ROI, though they may still be worth pursuing for quality-of-life reasons.
Tax Benefits to Know
One meaningful advantage of using home equity for renovations is the potential tax deduction. According to the IRS, interest paid on a HELOC or home equity loan is deductible — but only when the funds are used to “buy, build, or substantially improve” the home securing the loan. If you use the money for a vacation or debt consolidation, the interest is not deductible.
The deduction applies to the first $750,000 of combined home loan debt (mortgage + home equity loan/HELOC). So if you have a $600,000 mortgage and take out a $200,000 HELOC, you can only deduct interest on the first $750,000 combined — $150,000 of your HELOC balance would not be deductible. Always consult a tax professional for guidance specific to your situation. You can also review our homeowner tax credits and deductions guide for more detail.
Risks to Consider Before You Borrow
Borrowing against your home is a significant financial decision. Before you proceed, weigh these risks carefully:
- Your home is collateral. If you can’t repay the loan, the lender can foreclose. This is the most serious risk and should not be taken lightly.
- HELOC rates are variable. While rates are favorable now, a variable-rate HELOC means your payments can rise. Consider a fixed-rate home equity loan if you prefer predictability.
- Borrowing minimums. Many lenders set minimum loan amounts of $25,000–$30,000. If your project is smaller, a personal loan or credit card might be more appropriate.
- Closing costs. Home equity products typically carry closing costs of 1–5% of the loan amount, including appraisal and origination fees.
- Overborrowing risk. It can be tempting to borrow more than a project requires. Keep renovation budgets realistic and avoid overimproving relative to your neighborhood’s home values.
How to Qualify and Apply
Lenders evaluate several factors when you apply for a HELOC or home equity loan:
- Equity: Most lenders require you to maintain at least 20% equity in your home after borrowing. If your home is worth $400,000 and you owe $280,000, your maximum borrowing would be around $40,000 (keeping 20% equity).
- Credit score: A score of 680 or higher gets you to the table; 720+ qualifies you for the best rates.
- Debt-to-income ratio (DTI): Most lenders want your total debt payments to stay below 43% of your gross monthly income.
- Home appraisal: Lenders will verify your home’s current value, which determines how much equity you actually have.
To get started, shop at least three lenders — including your current mortgage servicer, local credit unions, and online lenders. Rates can vary significantly. See our best HELOC lenders guide for vetted options.
Love Your Rate? Keep It — Tap Equity Without Refinancing
A HELOC lets you fund repairs, upgrades, or improvements using your home’s equity — without touching your existing mortgage rate.
Frequently Asked Questions
Most lenders allow you to borrow up to 80–85% of your home’s appraised value, minus your mortgage balance. For example, if your home is worth $350,000 and you owe $200,000, you may be able to borrow up to $80,000–$97,500, depending on the lender’s guidelines.
It depends on your project. A HELOC works well for ongoing or phased projects because you draw funds as you need them. A home equity loan is better when you have a fixed, known cost — the predictable monthly payment makes budgeting easier.
Yes, in most cases. The IRS allows you to deduct interest on home equity debt used to buy, build, or substantially improve your home, up to $750,000 of combined mortgage debt. Keep receipts and documentation to support the deduction.
A HELOC is particularly useful here because you can draw additional funds (up to your credit limit) if costs overrun. With a home equity loan, you’d need to apply for an additional loan if you need more. Build a 10–15% contingency into your renovation budget as a buffer.
Yes. Personal loans, contractor financing, and 0% intro APR credit cards are options for smaller projects. For major work, home equity financing is typically the lowest-cost route. Some homeowners also use a cash-out refinance, which replaces your entire mortgage with a new, larger loan — though this makes less sense if your current mortgage rate is low.
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