Borrow against the equity in your house, as the project needs it.
A home equity line of credit, or HELOC, is usually the first thing I’d ask a bank about if you’ve owned your house a while, you’re planning to stay, and you want to add on or remodel.
It lets you borrow against the equity you’ve built up without touching your first mortgage. And because it’s a line of credit rather than one big check, it fits the way a construction project actually spends money.
But it has a catch or two that people don’t always hear about at closing.
A HELOC is a revolving line of credit secured by your house. The lender approves you for a maximum amount, and you draw from it as you need it, up to that limit. Pay some back and you can borrow it again, a lot like a credit card. The Consumer Financial Protection Bureau’s HELOC guide walks through the mechanics.
A HELOC has two phases:
Most HELOCs carry a variable rate: an index such as the prime rate, plus a margin. When the index moves, your rate moves with it.
Construction doesn’t get paid for in one lump. There’s a deposit, then payments as work gets completed. If your addition is $120,000, you may not need $120,000 on day one.
With a line of credit, you generally only pay interest on what you’ve actually drawn. Early in the project that might be $30,000. By the end, most of the line may be in use. That’s a real advantage over borrowing the full amount up front and paying interest on money that’s sitting in an account.
It also leaves room for the unexpected. If you open the wall and find rot, or you decide to add the covered porch after all, the money is there without applying for another loan. That’s useful, as long as you treat it as a safety net and not a license to keep adding.
A HELOC makes it easy to spend. That’s the good news and the bad news.
It depends on your home’s value, what you still owe on it, your credit and your income. Most lenders cap the total of your first mortgage plus the HELOC at a percentage of the home’s value, commonly around 80 percent, with some going to 85 or 90 percent, according to Bankrate.
A simple example. Your house is worth $400,000 and you owe $180,000. At an 80 percent limit, the lender will go up to $320,000 in total debt against the house. Subtract the $180,000 you owe and the most you could borrow is about $140,000.
That number is a ceiling. It isn’t a budget.
The rate can move. A variable rate that looks fine today can be noticeably higher in two years. As of mid-September 2026, Bankrate’s national average HELOC rate was about 7.1 percent, but that changes week to week. Ask what the rate is tied to, how often it adjusts, and whether there’s a cap. Some lenders let you convert part of the balance to a fixed rate.
Interest-only payments end. This is the one that surprises people. If you’ve only been paying interest for ten years, the payment can jump a lot when the repayment period starts and principal gets added. The Federal Trade Commission calls this out specifically. Run the numbers on the repayment-period payment before you sign, not after.
The lender can freeze or reduce the line. Under federal rules, a lender can suspend or lower your credit limit if your home’s value drops significantly or your finances change for the worse. The CFPB’s Regulation Z rules for home equity plans spell out when. You don’t want that happening halfway through a project, so don’t count on money you haven’t drawn yet as though it’s guaranteed.
Your house is the collateral. A HELOC is a loan against your home. If you can’t pay it, the lender can foreclose. That’s true of every option on this page that’s secured by the house.
There are fees. Appraisal, application and closing costs, annual fees, and sometimes a fee for closing the line early. Some lenders waive a lot of these. Ask for all of them in writing.
Sometimes. Under IRS Publication 936, interest on home equity debt is only deductible if the money is used to buy, build or substantially improve the home that secures the loan, and you itemize. A substantial improvement adds value, extends the home’s life or adapts it to a new use. An addition or a major remodel usually fits. Paying off a car does not.
There’s also a limit on the total mortgage debt that qualifies. Tax rules change, so run this one past your tax preparer. I’m a builder, not an accountant.
When you open a HELOC on your primary home, federal law generally gives you until midnight of the third business day after closing to cancel, in writing, for any reason. The CFPB explains the right of rescission here. It also means the money usually isn’t available until that window closes, which is worth knowing if a deposit is due.
They both borrow against your equity. The difference is how the money arrives. A HELOC is a line you draw on, usually at a variable rate. A home equity loan is one lump sum, usually at a fixed rate with a fixed payment.
If the scope is still moving, or the project will spend money over several months, a HELOC tends to fit better. If the price is locked and you want a payment that never changes, a home equity loan may be the better tool. Some lenders will show you both side by side. Ask them to.
Then decide how much you actually want to borrow, which is usually less than they’ll offer.
Can I use a HELOC to pay my contractor?
Yes. Once the line is open you can generally draw from it and pay project invoices as they come due. It’s one of the most common ways homeowners fund a remodel or addition.
Do I pay interest on the whole HELOC limit?
Generally no. You pay interest on the balance you’ve drawn, not the full credit limit. Some plans charge an annual fee for keeping the line open.
How long does it take to get a HELOC?
It varies by lender and whether an appraisal is needed, often a few weeks. Add the three-business-day cancellation window after closing before funds are usually available. Start early if you have a project start date in mind.
What happens to my HELOC if I sell the house?
The balance is paid off at closing out of the sale proceeds, like your first mortgage.
This page is general information, not financial advice. Smego Construction is not a lender, mortgage broker or financial advisor, and nothing here is a recommendation about your particular circumstances. Loan products, eligibility and terms change and vary by lender — confirm anything here with a qualified lender before making a decision.
Fifteen minutes on the phone. You’ll have a realistic range before we hang up — and if we’re not the right people for it, I’ll tell you.