For many homeowners, a home equity loan provides a convenient and affordable way to pay for essential home repairs or exciting renovations. The process is relatively simple. Homeowners borrow against the equity in their home and pay the loan back monthly over a five to 15 year term. Interest from the loan is tax deductible up to $100,000.

Although a home equity loan has many benefits, it is important to consider both the pros and cons. Ask yourself these questions:
(See below for more information.)

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How much equity do you have?
Banks will calculate the interest rate you pay based on several factors including how much equity you have in your home. Borrowing against your home when the equity is low (20% or less) it generally not a good idea. Your interest rate will be higher and the loan will seriously deplete your equity and a vital financial cushion – your home.

How much will it cost?
Create a firm estimate of what repairs or remodelling will cost before you approach lending institutions to negotiate a loan. Add 10 to 20% to the figure for cost overruns – repairs and renovations always cost more than you expect.

Can you afford it?
You may need the repairs or extra space desperately, but if you can’t afford the monthly loan payments you can’t afford to have the work done. Tally your existing monthly payments including your first mortgage, your monthly bills, your retirement savings, the college education fund and any outstanding debts including credit cards. How much is left over? Ideally, you want to be in a position to pay more than the minimum loan payment each month.

How essential is the project?
Is the project a “nice-to-have” project or one that will truly add value to your home? Although repairs must be done to maintain the integrity of your home (especially when they involve plumbing and wiring), home improvement projects are often extravagances that should be done only when you can truly afford them.

Is it money well spent?
Not all renovations pay off when it comes time to sell your house so think carefully about where you put your home improvement dollars. Kitchen and bathroom renovations pay back about 90% of their costs, however finishing a basement pays back as little as 15%.

Weight Cost Versus Quality of Life
Pools, hot tubs and home offices do not pay off in terms of the value they add to your home, however they can add value to your family’s life. These “quality of life” factors are also worth considering.