Two ways to use equity for home renovations

Learn how a cash-out refinance loan or home equity line of credit can make your home improvement plans a reality

A couple looking over renovation blueprints with a contractor

Every home needs to be repaired or renovated at some point — whether it’s adding a new coat of paint, remodeling the kitchen, or replacing the roof. Not only will improvements possibly add value to your home, but they can make living in your home more enjoyable.

Ideally, you would pay for home improvements with your savings, but that’s not always possible. Let’s take a look at two ways to use your home’s equity to finance those home improvements your savings can’t cover.

Option 1: Cash-out refinance

If refinancing makes sense for you, a cash-out refinance can be a great way to unlock your home’s equity to pay for home improvements (or other significant purchases). A cash-out refinance lets you access your home equity by replacing your existing mortgage with a new one that has a higher loan amount than what you currently owe. When you close on your loan, you’ll get funds you can use.

The amount you may be able to borrow is based on many things, including the available equity in your home and your credit qualifications. The amount of equity you have available is the difference between what your home is worth and the amount you owe on your home and any outstanding obligations that are secured by your home.

The process to refinance is similar to when you initially applied for your mortgage, including paying closing costs and other fees. The difference is that after your cash-out refinance closes, you’ll get a check for the equity you included in your refinance. You may also choose to electronically deposit these funds into your checking or savings account for quicker access.

Because you now have a new mortgage with a higher balance, it will increase your monthly payment depending on the terms of your new loan. Review your cash-out refinance options to determine if this is the right choice for your financial circumstances.

Option 2: Home equity line of credit

If you don’t want to refinance your mortgage but would like to use equity to finance home improvements (or other significant purchases), you should consider a home equity line of credit (HELOC) — a revolving line of credit secured by your home. The amount you may borrow (or your credit limit) is based on many things, including the available equity in your home and your credit qualifications.

Once approved, you can withdraw any amount (up to your available credit limit) during a draw period. And because a HELOC is a revolving line of credit, you’re only charged interest on the amount you withdraw and your monthly payments are based on your current balance. When the draw period ends, you can no longer withdraw money, and you’ll repay any remaining balance on your HELOC for a specified term.

Let’s take a look at some of the key benefits of using a HELOC:

  • Because your home is the collateral for your HELOC, you’ll typically get a lower rate when compared to a personal loan or credit card.
  • You’ll have the flexibility to access your funds when you need them — online, by phone, using checks, or a credit card tied to your HELOC.
  • The approval process for a HELOC may be faster than refinancing your mortgage. So if you need funds more quickly, a HELOC could be your best option.
  • The interest you pay on your HELOC may be tax-deductible if the funds are used to improve, buy or build a home. We encourage you to speak with a tax professional about your particular tax situation.

Calculate your home equity line of credit rates and payments to see if this is the best way for you to go.

Which option should you choose?

Both of these loan options can be good ways to use your home’s equity. If you want to compare the costs and fees of each option or have other questions before you decide what’s best for you, contact a home mortgage consultant.

1 Home equity access checks may not be accepted by all merchants or other third parties, and cannot be processed electronically. You may not use these checks to pay a balance on any home equity line of credit account you have with Wells Fargo. Home equity access checks are not available in Texas on homestead properties.

2 Enhanced Access® Visa® credit card is not available in Connecticut, New York, or Texas.