Home renovations are one of the most common reasons homeowners tap into their equity, and for good reason — improvements that increase a home's value or livability can make borrowing against that same home feel like a reasonable trade-off. But the two main tools for doing this, home equity loans and HELOCs, work differently and suit different types of renovation projects.
Why Home Equity Financing Fits Renovations
Home equity financing is popular for renovations for a few practical reasons:
- Interest rates on home equity loans and HELOCs are typically lower than unsecured options like personal loans or credit cards, since the debt is secured by the home.
- Loan amounts can be substantial, since they're based on the equity available rather than unsecured lending limits.
- In some cases, interest on home equity debt used to substantially improve the home may be tax-deductible, though tax treatment depends on individual circumstances and current tax law, so borrowers should consult a tax professional.
Home Equity Loan vs. HELOC for a Renovation
Choosing between a home equity loan and a HELOC often comes down to how the renovation will be paid for and how predictable the costs are. A full comparison is available in home equity loans vs. HELOCs, but in the context of renovations specifically:
Home equity loans provide a lump sum upfront with a fixed interest rate and fixed monthly payments over the loan term. This structure tends to suit projects with a known, fixed cost determined in advance — for example, a kitchen remodel with a signed contractor bid, or a bathroom addition with a set budget. Because the full amount is disbursed at once, there's less flexibility if the project's scope or cost changes partway through.
HELOCs work more like a credit line, allowing the homeowner to draw funds as needed during a draw period, paying interest only on the amount actually borrowed. This structure often suits phased renovations, projects with uncertain total costs, or homeowners tackling multiple smaller projects over time rather than one large one. The tradeoff is that HELOC rates are typically variable, meaning payments can fluctuate as the underlying rate index changes.
Cash-Out Refinance as an Alternative
Rather than taking out a second loan, some homeowners choose a cash-out refinance, which replaces the existing mortgage with a new, larger one and provides the difference in cash. This can make sense when current mortgage rates are favorable compared to the homeowner's existing rate, effectively combining a rate improvement with renovation funding into a single loan. However, if the homeowner's existing mortgage rate is already low, a cash-out refinance could mean giving up that rate on the entire mortgage balance just to access equity for a renovation — a tradeoff worth calculating carefully against a home equity loan or HELOC that leaves the first mortgage untouched.
Which Renovations Tend to Add the Most Value
While value impact varies significantly by market, home, and buyer preferences, renovations that tend to be associated with stronger returns relative to cost commonly include:
- Kitchen updates and remodels
- Bathroom additions or renovations
- Energy efficiency improvements, such as new windows, insulation, or HVAC systems
- Curb appeal projects, like landscaping, siding, or entry door replacement
- Adding usable square footage, such as finishing a basement or attic
Renovations that are highly personalized to a specific homeowner's taste — such as elaborate custom features — sometimes add less resale value than their cost, even if they significantly improve the homeowner's day-to-day enjoyment of the space. Because value impact is local and project-specific, homeowners considering a renovation primarily for resale value may benefit from a local real estate professional's input in addition to financing research.
Budgeting Before Borrowing
Before taking out home equity financing for a renovation, it's worth:
- Getting multiple contractor bids to establish a realistic project cost range, since renovation costs frequently run over initial estimates.
- Building in a contingency buffer, commonly 10% to 20% above the estimated cost, to cover unexpected issues discovered during the project.
- Reviewing current equity using a home equity calculation to understand how much is realistically available to borrow while maintaining a reasonable equity cushion.
- Comparing loan estimates from multiple lenders, since rates, fees, and terms for home equity products can vary meaningfully.
Risks Specific to Renovation Borrowing
Borrowing against home equity for renovations carries the same fundamental risk as any home equity debt: the home secures the loan, so failure to repay could put the home at risk. This risk is worth weighing carefully in the context of a discretionary project like a renovation, as opposed to, say, consolidating high-interest debt. It's also worth considering:
- Whether the renovation is likely to increase the home's value by roughly the amount borrowed, or whether it's primarily a lifestyle improvement without a strong resale payoff.
- Whether taking on additional debt fits within the household's broader financial plan and debt tolerance.
- How the new payment — whether fixed from a home equity loan or variable from a HELOC — fits alongside existing mortgage and other obligations.
For a broader look at the general risks and benefits of borrowing against a home, see pros and cons of borrowing against your home, and consider reviewing HELOC requirements to understand qualification standards before applying.