How to use home equity to make home repairs

Warm weather and sunny days mean different things to different people. For potential homebuyers, that means inventory is high and House hunting can begin completely. For existing homeowners, the spring and summer months mark a good time to complete major repairs and renovations, inside or outside their home.

Home values ​​have been hit Rising interest rates Some parts of the country in other parts Home values ​​are still high. For homeowners living in the latter part of the country, this means they could be sitting on substantial home equity. That equity can then be used to finance said repairs and renovations – usually at a lower interest rate than other loans.

This home equity can be used in a number of ways, with two of the most common methods Home equity loan And Home equity lines of credit (also known as HELOCs). We’ll break down both options in this article so you know exactly how to use your existing home equity to make home repairs.

You can easily check your eligibility and local options online now

How to use home equity to make home repairs

While you can technically use one Cash-out refinancing or Reverse mortgage For financing home repairs, many experts will advise you to explore your home equity loan and HELOC options as well. Here’s how you can use both:

How to use a home equity loan for home repairs

A home equity loan acts as a second mortgage in that you take out another loan from the existing equity you have built up in your home. Most lenders will limit you to 80% to 85% of your home equity although different lenders may have different restrictions.

Just understand that the amount of money you have on your home is different than the number of mortgage payments you make. For example, let’s say you originally bought your home for $500,000. You may have put down $50,000 since then but your home has increased in value by $600,000. That means you could potentially get a home equity loan for $150,000 – not just the $50,000 you invested.

Home equity loan interest rates are fixed, providing some much-needed predictability in your budget. Those rates tend to be lower than what you can qualify for if you choose to finance your repairs with a personal loan or credit card.

Why you should use a home equity loan for home repairs

A home equity loan has a fixed interest rate, which means you will have an exact figure to repay each month regardless of any adverse market conditions. And if you use it for an IRS-approved reason, you may be able to deduct the interest you paid on the loan during tax filing season.

“Home equity loan interest and lines of credit are deductible only when the borrowed funds are used to purchase, construct, or substantially improve the taxpayer’s home that secures the loan.” The IRS Says “the loan must be secured by the taxpayer’s principal home or second home (qualified residence) and meet other requirements.”

Research your home equity loan options online now to see if it’s right for you

How to use a HELOC for home repairs

A HELOC, like a home equity loan, uses the existing equity in your home to finance any expenses you may have. Unlike a home equity loan, this option works like a credit card as a revolving line of credit so you borrow money when you need it – and pay it back as you go. Because no lump sum is being issued, you’ll typically pay less interest on this type of credit than others, but the rate can be variable (unlike home equity loans, most of which are fixed).

A HELOC has two phases: the draw period (in which you take out the money, lasting from two to 10 years) and the repayment period (this is when you run out of drawing power and have to pay it back. You have a pre-determined owed on the deadline).

Why You Should Use a HELOC for Home Repairs

A HELOC, like a home equity loan, may come with a lower interest rate than a personal loan or credit card (assuming you have Good credit score and clean credit history). They have a favorable interest tax deduction when used for home repairs.

“Generally, you can deduct home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a,” the IRS says. “However, any interest shown in Box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by property, is not deductible if the proceeds are not used to purchase, construct, or substantially improve. Qualifying home .”

Check out your HELOC options today to determine your eligibility.

Bottom line

Homeowners with improved home values ​​and significant amounts of equity should consider forgoing credit cards and personal loans and instead turn to home equity loans, or HELOCs, to finance needed home repairs. Both options have attractive benefits for homeowners, and unlike other credit options, interest on home equity loans and HELOCs is tax deductible if used for qualified home repairs, improvements, and renovations.