Home equity loans and home improvements: What owners should know now

Looking for an affordable way to fund your next home improvement project amidst elevated interest rates?

Home equity loans can be a good option thanks to their relatively low costs and lenient eligibility requirements. Additionally, when you spend the loan funds on qualifying home improvements, the interest can be tax-deductible. 

Explore your home equity loan options here now to see what you could qualify for.

Home equity loans and home improvements: What owners should know now

If you’re a homeowner considering using your equity to make home repairs and improvements you should first familiarize yourself with the following items.

How interest on home equity loans can be tax deductible

The interest on a home equity loan (and a home equity line of credit or HELOC) can be tax deductible if the loan is secured by a qualifying residence and used to make “substantial” improvements to that home. 

A qualifying residence can be a borrower’s main or second home, although restrictions apply if you rent out your second home. Note, it can be a house, condo, mobile home, house trailer, boat, or other property with cooking, sleeping, and toilet facilities, as defined by the IRS. 

To qualify, you can’t be upside down on your home (have negative equity). Additionally, you can’t write off interest on over $750,000 of indebtedness.

Review your home equity loan options here and learn more.

What types of home improvements qualify for the tax deduction?

A home improvement is considered “substantial” if it adapts your home to new uses, prolongs its useful life or adds value to it. Here’s a closer look at the home improvements that qualify under each category. 

Adapts a home to new uses

Examples of home improvements that adapt your home to new uses include:

• Adding an elevator
• Replacing steps with ramps
• Removing walls to create open-concept spaces
• Adding a built-in swimming pool

Prolongs a home’s useful life

Home improvements that increase the longevity of your home can include:

• Adding attic insulation
• Replacing the roof
• Redoing duct work 

Adds value to a home 

Lastly, home improvements that add value to your home can include:

• Installing a central air conditioning unit
• Adding a tankless water heater
• Installing energy-efficient windows
• Building a deck

This is not an exhaustive list so make sure to consult a tax professional before assuming a specific repair or project would qualify for the home equity loan tax deduction.

What types of home improvements won’t qualify for the tax deduction?

Many projects qualify you for the tax deduction, but not all.  

“Home improvements that don’t qualify include the cost of repairs or maintenance. For example, painting a room or fixing a leaky faucet would not typically qualify as a substantial improvement,” says Karla Dennis, an Enrolled Tax Agent and the founder of Karla Dennis & Associates. 

However, if a repair or maintenance project is part of a larger home improvement project, it might qualify. 

For example, the IRS says painting your home as part of regular maintenance wouldn’t be considered substantial, but painting it as part of a renovation that involves other improvements could qualify. 

If you have any questions about what projects qualify, you may want to consult a tax or financial advisor. 

You can easily check home equity loan rates and eligibility here now.

Other home equity loan benefits

Home equity loans also offer benefits beyond the potential tax savings. 

Competitive interest rates

If you end up using the funds for other expenses, banks often offer competitive home equity loan interest rates. “Home equity loans typically have lower interest rates than credit cards or personal loans, which can make them a cost-effective way to borrow,” says Dennis.

Predictable payments

The fixed interest rates also offer predictability. “A fixed interest rate and set repayment schedule makes budgeting for the loan easier,” adds Dennis. 

Large loan amounts (potentially)

Further, you can likely borrow more than you’d have access to through alternative borrowing solutions. “Because home equity loans are secured by your home, you may be able to borrow a substantial amount of money, depending on the amount of equity you have in your home,” Dennis says. 

Is a home equity loan right for you?

Home equity loans can be a great option for homeowners who need a lump sum of cash. However, it’s important to remember that the loan is secured by your home, so the payments need to comfortably fit into your budget. 

Using home equity funds for expenses that help you gain savings or returns — such as investing in home improvements, consolidating high-interest debt, or paying for college tuition — can help to reduce the risk of borrowing by working to improve your overall financial situation.

It’s also a good idea to shop around and compare the loan offerings of at least three banks/lenders so you can find a competitive deal.