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Refinancing Your Mortgage – How and Why Would You Take out Equity for Home Repairs and Renovations?

Refinancing Your Mortgage – How and Why Would You Take out Equity for Home Repairs and Renovations?

Newly renovated large kitchen with island and dining room

If you have enough equity built up in your home, it can be a valuable asset. A home equity loan (often called a second mortgage) is available to you if you need cash for renovations or home repairs. Interest rates on home equity loans are higher than they are on mortgages; but they’re lower than the rates on credit cards and other types of loans you might be thinking of using – making a second mortgage a more affordable option.


You can take out a home equity loan by calculating the amount of equity you have in your home and shopping for a loan that you can afford from lenders. In some cases, you can even access up to 80% of your home’s appraised value. Generally all you need is at least 20% equity in your home to refinance your mortgage to some extent.

Renovations can be a great investment (if done wisely). To help you decide if refinancing your mortgage with a home equity loan makes sense for you, we’ve put together a list of renovations that add value to your home – and a list of improvements that are “value-neutral” to keep in mind when making this decision.


– renovate your kitchen

– add or remodel bathroom(s)

– create a master bedroom with walk-in closet and/or en-suite bath

– add a family room (on the main floor is best)

– create a sun room


– adding a sauna, hot tub or swimming pool

– installing a central vacuum system

– reducing the number of bedrooms (to less than 3)

– installing paving stones in your driveway

If you’re taking out equity to renovate your home with the intention of adding to it’s value, it’s best to channel those funds in the right direction. Renovations can improve the quality of your life and the value of your property; but whether it’s a repair, an addition, or a face-lift, you need to secure your finances and create a workable budget for yourself. Here are some helpful steps to get you started:

  1. Review your finances. Make sure you can or have a plan to, repay the loan before you take it out against your home.
  1. Have a plan for the money. It’s best to budget with a plan as to where the money will go.
  1. Figure out how much you actually need to borrow. You can deduct the interest you pay on the loan when you file your income tax return (on up to $100,000).
  1. Determine how much equity you have in your home. Get your home appraised to find out what it’s worth. Then subtract the amount you still owe on your mortgage from the appraised value of your home – that amount is the “equity” you can access.
  1. Shop around for rates. Talk to your mortgage broker about home equity loans. Compare rates, fees, and the length of terms. Do they match up with your financial comfort zone?
  1. Choose the lender with the best offer, and apply for your home equity loan. Fill out the application forms with your mortgage broker. Whether you fill these out online, in person, or mail them in, make sure your credit score is accurate. Lenders will check your credit score, review all of your debt, and confirm your income.
  1. Read those documents! Read the loan documents before you sign them. Make sure that you understand the terms of repayment and the interest rate. If you have any questions, you can call your broker to help get a better understanding.

Even with all of this planning, there are a couple of potential road bumps along the way. You should pay attention to the housing market when you take out your loan. Having a home equity loan can be dangerous if your house starts losing value. In this case your equity decreases, and there’s a chance you could end up owing more than your home is worth.

Some lenders even offer loans that are worth 125% of a home’s equity – in this case encouraging you to take out a loan for more than your house is worth. These kinds of loans carry additional fees, and you won’t be able to deduct interest on any money you borrow above the value of your home.

With the right intention and the proper research (including open communication with your mortgage broker, lenders and tax planners) you can take out equity with great results. Just make sure your loan is realistic for lenders, for the marketplace, and most importantly, for yourself so that you can enjoy the process of “home improvement.” Living in the house of your dreams is possible with the right strategy, but as with many decisions in life, it’s important to make sure you’re not getting in over your head.

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