Which loan type allows the borrower to fund home improvements while using the equity built up in the home?

The correct choice is home equity line of credit (HELOC). This loan type specifically allows homeowners to borrow against the equity they have built up in their home to finance various expenses, such as home improvements. Unlike traditional loans, a HELOC functions more like a credit line, enabling borrowers to withdraw funds as needed, making it flexible and ideal for ongoing renovation projects.

Homeowners can use the equity that's available based on their home's current market value in relation to the outstanding mortgage balance. This option often comes with lower interest rates compared to personal loans or credit cards, and it can be a very effective way to manage renovation costs.

In contrast, a cash-out refinance involves replacing the existing mortgage with a new, larger mortgage, allowing the borrower to take cash out for improvements. While this also taps into home equity, it essentially resets the mortgage terms and may involve additional costs.

A construction loan is specifically intended for funding the building of a new home or major home renovations before completion. It typically provides short-term financing and doesn’t directly tap into the existing home equity.

A reverse mortgage allows seniors to convert a portion of their home equity into cash without selling their home. However, it is generally not aimed at funding home improvements and has specific eligibility criteria