Why homeowners and investors are turning home equity into powerful renovation financing and how to decide if it’s right for you
Home Equity: In 2025, many homeowners and a growing number of real estate investors are choosing to renovate their current homes rather than buy new properties. Home inventory remains low, prices continue climbing, and mortgage rates have made many buyers hesitant to trade in their existing low-rate mortgage loan for a higher one.
As a result, homeowners are deciding to stay where they are and improve the spaces they already own. But there’s one big question: How do you pay for renovations without draining your savings?
For many, the answer is turning their home’s equity into usable funds through a home equity loan or a HELOC (Home Equity Line of Credit). These tools allow homeowners to borrow against the value they’ve built in their home converting equity into affordable renovation financing.
Why More Homeowners Are Using Home Equity Instead of Paying Cash
With national home values having appreciated significantly over the past decade, homeowners today hold historic levels of equity. Recent market data shows that U.S. homeowners collectively had over $17.8 trillion in home equity by mid-2025 equivalent to an average of $302,000 per mortgage-holding homeowner.
This means many borrowers now have the ability to use their home’s value to fund improvements. Instead of dipping into savings or taking out high-interest personal loans, tapping equity allows borrowers to secure:
- Lower interest rates
- Larger loan amounts
- Tax-deductible interest (when used for qualified improvements)
- Flexible repayment terms
For homeowners and investors alike, using equity is a smart way to make your property worth more over time.
Why Using Home Equity for Home Improvement Makes Sense in 2025
According to housing research firm Cotality, the average mortgage borrower has around $194,000 in tappable equity meaning the amount they can borrow while keeping at least 20% ownership in their property, which home lenders typically require.
A 2025 survey from TD Bank revealed that most borrowers accessing home equity did so to improve their current property. Many preferred renovating because:
- Housing inventory is limited
- Mortgage rates on their current loans are too favorable to give up
- Renovating often costs less than purchasing a new home
- Homeowners want to customize or modernize their living space
Steve Kaminski, head of residential lending at TD Bank, noted that declining HELOC rates and strong equity positions are motivating homeowners to stay put and invest in their homes.
With HELOC and home equity loan interest rates averaging around 8%, they are still more affordable than most personal loans or credit cards. For example:
- Credit card rates average nearly 20%
- Personal loans average 12–14%
- HELOCs and home equity loans are secured by your home, offering significantly lower rates
For large projects like additions, kitchen overhauls, outdoor improvements, or energy-efficient upgrades home equity financing is often the most cost-effective strategy.
How Does Using Home Equity for Renovation Work?
Homeowners have two main options: home equity loans and HELOCs.
Home Equity Loan (Fixed Loan)
A home equity loan is similar to a traditional mortgage:
- Lump sum disbursement
- Fixed interest rate
- Fixed monthly payments
- Repayment terms of 5–30 years
This is ideal when you know the exact cost of your renovation. For example, if a contractor quotes you $35,000 to remodel your kitchen, a home equity loan provides stable payments and predictable costs.
HELOC (Home Equity Line of Credit)
A HELOC works more like a credit card backed by your home:
- Draw funds as needed
- Variable interest rate (some lenders offer fixed options)
- Interest-only payments during the draw period
- Usually a 10-year draw period, followed by a 10–20-year repayment period
HELOCs are great for:
- Long-term projects
- Projects with unknown or flexible budgets
- Fluctuating costs (common with investors)
Home lenders typically allow you to borrow up to 80–85% LTV (Loan-to-Value) based on your home’s current appraised value. Investors often prefer HELOCs because they can borrow only what they need for each project, reducing interest costs.
Benefits of Using Home Equity for Home Improvements
1. Lower Interest Rates
Because home equity loans and HELOCs are secured by your home, lenders offer interest rates significantly lower than unsecured financing. Example monthly payment on a $20,000 renovation (5-year repayment):
| Financing Type | Rate | Monthly Payment | Total Interest |
| Home Equity Loan | 8% | $406 | $4,332 |
| Credit Card | 20% | $530 | $11,789 |
| Personal Loan | 13% | $455 | $7,304 |
The savings are substantial—one reason both homeowners and investors prefer equity-based financing.
2. Possible Tax Deduction
Interest paid on home equity loans and HELOCs may be tax-deductible if the funds are used for improvements that add value to the home securing the loan.
For example:
✔ Kitchen remodel
✔ Roof replacement
✔ Plumbing upgrade
✔ Solar installation
Not deductible:
✘ Paying debt
✘ Travel
✘ Non-home-related expenses
Tax laws allow single or joint filers to deduct interest on up to $750,000 of qualified home loans. (Always consult a tax professional for your specific scenario.)
3. Increases Property Value
Using equity to enhance your home creates a value-building cycle for homeowners and investors:
- Equity →
- Renovation →
- Higher home value →
- More equity over time
Improving your home’s systems, aesthetics, and functionality increases long-term value even if you don’t plan to sell soon.
Drawbacks of Using Home Equity for Home Improvements
While powerful, home equity financing does come with risks.
1. Your Home Is Collateral
If you cannot repay, the lender may foreclose. Borrowers must be confident in their repayment plan.
2. You May Borrow More Than Needed
Some lenders have minimum loan amounts often $25,000–$30,000. Borrowers who only need $10,000 may be forced to take a larger loan.
3. Closing Costs and Fees
Home equity loans include:
- Origination fees
- Appraisal fees
- Recording fees
- Title-related costs
Total fees can range from 1% to 5% of the loan amount.
Home Equity Loan vs. HELOC for Renovations
Home Equity Loan Pros
- Fixed payments
- Predictable budgeting
- Best for one-time projects
Home Equity Loan Cons
- May borrow more than needed
- Harder to adjust mid-project
HELOC Pros
- Flexible borrowing
- Pay interest only on what you use
- Ideal for multi-phase projects
HELOC Cons
- Variable rates
- Easy to overspend
- Possible annual fees
How Much Can You Borrow?
The amount varies based on:
- Home value
- Remaining mortgage balance
- Credit score (mid-600s or higher recommended)
- Debt-to-income ratio (below 43%)
Most home lenders allow you to borrow up to 80–85% LTV. Some allow 90–95% for strong borrowers or investors with excellent credit. Before issuing funds, the lender will require an appraisal to determine your home’s current market value.
What to Consider Before Using Home Equity for Renovation
Ask yourself:
1. Will the Renovation Add Value?
Not all improvements increase home value equally. Kitchen and bathroom updates generally have strong ROI. Luxury projects may not.
2. Do You Have a Realistic Budget?
Renovations almost always cost more than expected. Build in a buffer.
3. Have You Compared Home Lenders?
Rates vary significantly. Shopping around for a home loan or HELOC can save thousands over the life of the loan.
Conclusion
Using a home equity loan or HELOC to finance renovations is a smart strategy for many homeowners and investors. It offers lower interest rates, potential tax deductions, and the opportunity to increase your property’s long-term value. But it’s important to weigh your budget, goals, and risks before tapping into your home equity.
With the right planning and the right home lenders you can turn your home’s equity into powerful financial leverage for creating the home of your dreams.
At First Nation Financial, we don’t just push paperwork, we partner with you, guide you step by step, and help you understand exactly what you need to do to qualify. We believe in second chances, creative solutions, and turning “not yet” into “let’s do this.”
So if you’ve been waiting until everything’s “perfect,” here’s your sign: it doesn’t have to be. What you need is someone who understands where you’re coming from and knows how to get you where you want to go.
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