Home Equity vs. Home Improvement Loan: Which Is Better for a Renovation?

Planning a home renovation is exciting, but figuring out how to finance it can be challenging.

Two popular options are home equity vs. home improvement loans, each with benefits and costs. While both can help you achieve your renovation goals, one may suit your needs.

In this article, we’ll break down the differences and look into why home equity is often the better choice for larger projects.

Understanding home equity for renovations

Home equity is the portion of your home you’ve already paid for.

To estimate your home equity, subtract your remaining mortgage amount from your home’s market value.

Your equity grows as you pay down your mortgage or your home’s value increases.

A home equity line of credit (HELOC) enables you to borrow against your home’s equity—typically at a lower interest rate than other financing options because your home serves as collateral.

Why home equity may be the best fit for renovation projects

• Flexible borrowing: A HELOC lets you borrow only what you need when needed—making it ideal for projects with changing costs.
• Lower interest rates: Home-equity-backed loans and lines of credit typically offer lower rates than unsecured loans.
• Potential tax benefits: At tax time, the interest you’ve paid on a HELOC used for home improvements may be tax-deductible (talk with a tax advisor to see if you qualify).

What is a home improvement loan?

This type of personal loan is unsecured and used to finance smaller projects—it’s not tied to your home’s value.

Home improvement loans offer a fixed loan amount with a set repayment period.

While home improvement loans may be easier to obtain and suitable for minor upgrades, they come with higher interest rates because they are unsecured.

Plus, they lack the borrowing flexibility of a HELOC, which could be a disadvantage if your renovation budget changes mid-project.

Comparing home equity vs. home improvement loan

You may already have all the financing you need in your home equity without applying for a new home improvement loan. Let’s compare them side-by-side.

Interest rates and costs

• Home equity loans and HELOCs: Secured by your home, these options usually offer lower interest rates, making them more affordable in the long run.
• Home improvement loans: These unsecured loans come with higher interest rates, which can increase your overall borrowing costs.

Borrowing flexibility

• Home equity options: A HELOC provides flexibility by allowing you to borrow as needed. This is ideal for larger, multi-phase projects.
• Home improvement loans: These provide a lump sum upfront, which might not be enough for projects with variable costs or long timelines.

Loan terms

• Home equity loans: Usually offer longer repayment terms, which results in lower monthly payments, which are helpful for managing your expenses.
• Home improvement loans: Shorter repayment periods often lead to higher monthly payments, which may strain your budget.

Loan amounts

• Home equity loans and HELOCs: Typically offer higher loan amounts, making them better suited for extensive projects like kitchen remodels or home expansions.
• Home improvement loans: Usually have lower limits, which might not cover the full cost of major renovations.

Why home equity is the better option for renovations

When comparing home equity vs. home improvement loans, home equity financing stands out for several key reasons:

• Lower interest rates: Secured by your home, home equity loans and HELOCs come with significantly lower rates than unsecured personal loans.
• Flexible borrowing: A HELOC lets you borrow as your project progresses, ensuring you only pay interest on the funds you actually use.
• Higher loan amounts: Home equity loans provide more substantial funding, making them ideal for larger projects.
• Potential tax benefits: Home equity loans or HELOCs used for qualified home improvements may offer tax deductions on interest, reducing overall costs.

When a home improvement loan might be considered

While home equity is often the better choice for larger renovations, there are times when a home improvement loan might be more suitable:

• For smaller projects: If your renovation is manageable within a smaller budget, it can be a quick and simple solution without using your home equity.
• If you have limited equity: Consider a personal loan if your home equity is insufficient, but note that interest rates and terms may be less favorable.

Tips for choosing the right financing option for home improvement

When deciding between home equity and a home improvement loan, consider the following:

• Project size: Larger projects usually require the flexibility and higher borrowing capacity of home equity options, while smaller projects may be better suited for a personal loan.
• Current home equity: Evaluate how much equity you have built in your home to determine if a home equity loan or HELOC is available to you.
• Interest rates: Compare both options’ interest rates and terms to ensure you’re selecting the most cost-effective financing.
• Loan flexibility: If your renovation is likely to evolve, a HELOC’s flexibility can be a significant advantage.

FAQ: Home equity vs. home improvement loans

Home equity with HomeEQ: The smarter choice for your renovation

When it comes to financing a renovation, home equity offers more flexibility, lower costs, and greater borrowing potential compared to a home improvement loan.

Simple, straightforward: Get the money you need

Access cash from the investment you’ve made in your home with HomeEQ’s HELOC.

Our straightforward, fully digital HELOC application lets you know in minutes if you qualify.

Decide if a HELOC is the right option for you, and you might receive your funding within days.