If you own a home, there’s a good chance you’ve thought about making improvements. It might be a dream kitchen, a finished basement, or (though not as fun) a roof that needs to be replaced.

Fortunately, one solution for financing home renovations may already be under your roof: the equity you’ve built in your home.

What is home equity?

Home equity lets you borrow against the equity you've built in your home. That’s the difference between what your home is worth and what you still owe on your mortgage. For example, if your home is worth $400,000 and your mortgage balance is $250,000, you have $150,000 in equity. However, most lenders limit borrowing to a percentage of your home's value. So, if a lender allows borrowing up to 80% of your home's value, you may be able to access as much as $90,000 of that equity. Actual borrowing limits vary by lender, property type, credit qualifications, and loan product.

But before you consider home equity, there are some important things you should know, according to Stephanie Ortiz, Liberty Bank’s First Vice President, Consumer Lending & HSA Sales Manager. Let’s take a look.

Home equity loan vs HELOC: Know the difference

According to Stephanie, people sometimes get confused about the two types of home equity: home equity loans and lines of credit (HELOCs). “A home equity loan provides stability and predictability, which many customers value when they have a planned use of funds such as a project. A HELOC, on the other hand, offers flexibility, allowing homeowners to access funds as needs arise and pay interest on what they use,” she shares.

The chart below shows the differences:

	Home Equity Loan	Home Equity Line of Credit (HELOC)
What it is	A lump-sum loan with a fixed interest rate that you repay over a set time period.	A revolving line of credit (like a credit card) that allows you to borrow, repay, and access funds again up until the end of the draw period.
What it’s ideal for	If you have a one-time project where you need a fixed amount of money and want to pay off the loan by a certain timeframe. Or you prefer predictable monthly payments.	If you’re doing ongoing renovations and projects with unknown costs or if you want the flexibility to borrow as you need to.
How funds are received	All at once, after the recission period (when you can cancel the loan).	You can borrow throughout the draw period as long as credit is available within the approved limit.
How funds are repaid	You’ll pay fixed monthly payments for a specified term up to 20 years.	During a draw period, you may only have to make interest payments on the amount you borrow. After the draw period, your loan will enter repayment, and you will make payments of principal and interest.
Interest rates	Fixed	Usually variable, though some lenders may offer a fixed introductory rate for a period of time.
Benefits	Predictable monthly payments that make budgeting easier.	Gives you the flexibility to borrow funds when you need them. You only pay interest on the amount you use.
Drawbacks	Less flexibility if you need additional funds later.	If interest rates rise, your payments will go up.

Using home equity for renovations

Because home equity may offer lower rates than other borrowing options and potential tax benefits (consult your tax advisor), it can be a smart choice for financing home renovations and other expenses. That may include kitchen updates, bathroom remodels, finished basements, home additions, and other projects that enhance your home’s value. Ultimately, though, how you use your home equity line or loan is up to you.

What’s better for financing home renovations – home equity loan vs. HELOC?

“Many homeowners aren’t sure which is the right option for them,” she shares. “The decision ultimately comes down to how and when you need access to funds, and what best aligns with your objectives.”

Other uses of home equity

Think home equity is just for renovations? It’s not. "We have customers who use home equity to pay off credit cards, consolidate debt, pay for college, purchase second homes, cover wedding expenses, and even help with funeral costs," says Stephanie. Liberty Bank also allows qualified borrowers to use a home equity loan or HELOC to help fund business expenses.

Factors to consider before you apply for home equity

Before you apply for home equity, you should answer the following questions:

What’s the reason you are borrowing?
Do you know the costs involved?
How do you need to use the money – in a lump sum or over time?
Do you want predictable monthly payments or are you comfortable with payments that may change?

Of course, the most important thing to know about home equity is that it is a second mortgage on your home. If you use it wisely, though, it can be a smart way to improve and increase the value of your home, manage unexpected expenses, and reach other goals.

At Liberty Bank, we’re committed to being a trusted partner at every stage of the homeownership journey. Our role is to provide guidance, education, and products that truly make a difference for the individuals, families and communities we serve.

Related Links:

SoLo Home Equity Line of Credit: Get the flexibility of a revolving line of credit but with a low fixed interest rate for the first 12 billing cycles.

Fixed-Rate Home Equity Loan: Get the money you need all at once with a fixed interest rate and payments that make budgeting easier.

Good Neighbor Home Equity: Qualified borrowers in eligible communities may be able to borrow up to 125% combined loan-to-value, subject to underwriting requirements.

This article is provided for general educational purposes only and should not be considered financial, legal, tax, or lending advice. All loans are subject to credit approval and other underwriting requirements.

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