The best way to finance home improvements comes down to your borrowing power and you may have more than you think. Researching and comparing home improvement loans is a daunting task for many homeowners—especially new ones—but it doesn’t have to be.
RenoFi is committed to educating homeowners on the options as well as partnering with them to secure the best outcomes.
Financing Home Improvements: An Overview
In an ideal world, homeowners would always have the cash on hand to make desired improvements to their homes, from updating kitchens and baths to replacing roofs and HVACs. However, very few people are in a position to pay for such big improvements outright, and most homeowners rely on equity to make home renovations and improvements possible.
Equity is the difference between the value of your home and what you owe on your mortgage. Simply put, if your home is valued at $500,000 and you have $300,000 remaining on your mortgage, you have $200,000 in equity.
However, home improvement loans are not as simple as marching down to the bank and asking for $200,000 to start on that dream kitchen, backyard pool, and additional guest room. There are application processes, credit score checks, loan and appraisal fees, and more.
Additionally, homeowners have to take into account factors unique to their own circumstances. Are you expecting to move in a few years or planning to stay in the home for decades? Will you have college tuition to pay for teenage children or health-related expenses to consider? Home improvements are always part of a bigger financial picture.
Once you have defined realistic goals for home improvements, there are many loan types to consider that will get you there, but you need to understand the pros and cons associated with them.
Types of Home Improvement Loans
Three of the main ways homeowners finance large home improvements are through home equity loans, a home equity line of credit (HELOC), and a cash-out refinance.
1. Home Equity Loans
A home equity loan is a lump sum with fixed payments; it is predictable so that a homeowner can plan and budget for the repayment process. The lending institution evaluates the equity and value of the home along with other factors before agreeing to a lump sum and in addition to the payments, the homeowner may have other fees (just as they did with the initial mortgage).
Home equity loans work well for many homeowners who can plan and budget accordingly, although they may not always be able to secure enough funds (based on their equity) to complete the desired renovations.
Scenario 1 (New Home Purchase): For example, to make the math simple, let’s say you just purchased a $600,000 home:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
You want to spend $150,000 to renovate your new home and increase the value of your home.
Traditional Home Equity Loan Terms:
A traditional Home Equity Loan may offer up to 80% of your home value as a second mortgage in the second lien position (second priority of debt that gets paid out after the 1st), depending on the first mortgage balance.
Home price: $600,000
Current Mortgage Balance: $480,000
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)
Using a traditional Home Equity Loan, you would be unable to borrow any money to renovate your new home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
Home price: $600,000
Current Mortgage Amount: $420,000
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)
Using a traditional Home Equity Loan, only after you paid 10% of your mortgage ($60,000), you would be able to borrow $60,000 for your renovations. However, you are still short $90,000 from the $150,000 that you want to spend renovating your home.
2. Renofi Home Equity Loan
Instead of only using the equity you have in your house, RenoFi allows you to use the After Renovation Value (ARV) of your home as a lump sum at a fixed interest rate.
For example, if RenoFi assesses your renovation plan and believes you will increase the value of your home from $600,000 to $750,000, RenoFi loans will allow you to take a loan against the future ARV (After Renovation Value) of your home of $750,000.
Scenario 1 (New Home Purchase): Using the same example above where you want to spend $150,000 to renovate your new home and increase the value of your home by $150,000:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Without RenoFi loans, you would not have been able to borrow the $150,000 needed to add the renovations that would increase the value of your home by $150,000. Now, with RenoFi loans, you are now able to get the loan you need to add the renovations you want to your home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Loan Amount:
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Here’s a summary of the difference between traditional and RenoFi home loans in table form:
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
RenoFi loans are funded on the day the loan is closed and that is it. Take out the $195k and you get $195k in your bank and you have 20 years to pay off in equal monthly payments with interest and principal, just like a standard mortgage.
3. HELOC
A HELOC is structured differently than a lump sum loan in that the homeowner has an available (revolving) line of credit to use. The interest rates are variable with HELOCs, so homeowners must be prepared for fluctuations in the payment schedules when they use the funds.
Just like a credit card, you can borrow money with a HELOC up to a pre-approved limit, but the equity in your home backs it. HELOCs have variable interest rates and let you draw funds as needed, making them ideal for long-term or ongoing renovation projects.
Scenario 1 (New Home Purchase): Using the same scenario from above:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
- Renovation Loan Amount Needed: $150,000
Traditional Home Equity Line of Credit Terms:
A traditional Home Equity Line of Credit may offer 80% of your home value:
Home price: $600,000
Current Mortgage Balance: $480,000
Example Home Equity Line of Credit % of Home Price: 80%
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit Amount)
Using a traditional Home Equity Line of Credit, you would be unable to borrow any money to renovate your new home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
- Example Home Equity Line of Credit % of Home Price: 80%
- Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)
Using a traditional Home Equity Line of Credit, only after you paid 10% of your mortgage ($60,000), you would be able to borrow $60,000 for your renovations. However, you are still short $90,000 from the $150,000 that you want to spend renovating your home.
4. RenoFi Home Equity Line of Credit (RenoFi HELOC)
Unlike traditional loans, RenoFi HELOCs allow you to use your home’s After Renovation Value (ARV), which can 11x your borrowing power.
Scenario 1 (New Home Purchase): Using the same example above of borrowing $150,000 for renovations to increase the value of your home by $150,000:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
RenoFi HELOCs provide a line of credit secured by your current home.
Example RenoFi HELOC Terms:
Years to use credit line: 10 Years
- Interest Only Period: 10 Years
Credit Amount: $195,000
Repayment Term: 15 years
In this example, you’ll have 10 years to use your credit of $195,000. Within those 10 years, just like a credit card, if you borrow against the credit line and pay it back, you will not pay interest.
However, for anything borrowed against your credit, that you do not pay off immediately, you will only pay interest during the first 10 years and then interest and principal after year 10.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Line of Credit Amount:
Example Home Equity Line of Credit % of Home Price: 80%
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
5. Cash Out Refinance
A cash-out refinance allows a homeowner to take out a new loan for more than they own on a current mortgage and receive the excess as a lump sum. That excess is put toward renovations, and the new mortgage effectively “pays off” the old one.
Cash-out refinancing requires some strategic planning, as you do not want to be at a disadvantage if the interest rates and terms are significantly worse than your existing mortgage.
As we discussed, you may also want to compare a cash-out refinance with other options, such as personal loans or home equity loans. If you are using the funds for substantial home improvements, like those that can add square footage, the mortgage interest on a cash-out refinance may be tax-deductible in some cases. This type of financing might also be a great option if you are aimed at increasing the home’s value.
Big projects like adding an extra bathroom or renovating the kitchen can boost your resale value and allow you to recoup a bit of your investment in the long run.
Scenario 1 (New Home Purchase): Using the same example above
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)
Similar to the situation with Home Equity Loans and HELOCs, with a traditional Cash Out Refinance on a new property, you would be unable to withdraw any money for renovations.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Cash Out Refinance Amount:
Example Cash Out Refinance % of Home Price: 80%
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Cash Out Refinance Amount)
Again, since you are only able to withdraw $60,000 using a traditional cash out refinance, you are still unable to get the $150,000 you wanted for your home renovations.
6. RenoFi Cash-Out Refinance
Similar to other RenoFi products, with a RenoFi Cash Out Refinance, you can receive a larger amount of cash based on the After Renovation Value (ARV) of your home.
Scenario 1 (New Home Purchase): Using the same example above
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Cash Out Refinance Amount)
By writing a loan against your equity in the after-renovation value of your home, RenoFi allows you to borrow funds for renovation against $750,000 versus $600,000. This increases your loan amount from $0 to $195,000, allowing you to borrow infinitely more than a traditional Cash Out Refinance for renovations.
This allows you to receive the $150,000 you were looking for with house renovations and even offer $45,000 above what you were asking for in case you needed more money for renovations.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Cash Out Refinance Amount:
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Cash Out Refinance Amount)
Using a RenoFi Cash Out Refinance, you have increased your loan amount from $60,000 to $255,000 because the RenoFi loan is written against the assessed after renovation value (ARV) of $750,000.
Again in this scenario, using RenoFi you are able to borrow significantly more than traditional loan options and borrow the $150,000 you are looking for to make your renovations and even have the option to receive $105,000 on top of the $150,000.
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
7. Personal Loans
Personal loans are typically unsecured and can be used for any purpose, including home renovations. They usually don’t require any kind of collateral to secure the loan but might have higher interest rates compared to secured loan options.
If you are looking for help with a personal loan, the Renofi Marketplace offers personal loans through lending partners to help you find lenders for your property. Typical loan amounts can be up to 100k on 20 year terms, but will not use your after renovation value.
8. FHA 203(k) Loans
With this type of loan, you are combining the cost of purchasing the home with the renovation expenses. They are backed by the Federal Housing Administration (FHA) and are good for someone looking to purchase and renovate a home.
If you are looking for help with a FHA 203(k) loan, the Renofi Marketplace offers 203k loans through lending partners to help you find lenders for your property.
9. FHA Title 1 Home Improvement Loans
These loans are often used for home improvements and don’t require any equity. They can be used for a wide range of renovation projects and are available to homeowners with varying credit scores.
10. VA Home Improvement Loans
These loans are offered by the Department of Veterans Affairs (VA) and are for veterans and active duty service members. The fund can be used for home renovation and improvement projects.
11. USDA Rural Development Loans
The USDA offers loans as well as grants for home improvements. These can be used by eligible homeowners in rural areas. They are meant to provide safe and sanitary housing.
12. Energy Efficiency Financing and Home Renovation Grants
Otherwise known as green loans, they are designed for energy-efficient home improvements like solar panel installation, HVAC upgrades, and new insulation. These loans also often come with different incentives like rebates or tax credits.
13. Construction Loans
Construction loans are a short-term financing option. These loans are used to finance the construction of a home or significant renovations. They typically convert to a mortgage after the construction or renovations are completed.
If you are looking for help with a construction loan, the Renofi Marketplace offers construction loans through lending partners to help you find lenders for your property.
Tips on Finding the Right Loan
To get the best home improvement loan for your situation, it’s always a good idea to compare lenders and see which loan will keep you in the best financial position possible.
Factors to Consider
- Loan Amount Needed: A larger project will require more funding. In this case, a RenoFi loan or home equity loan would be ideal. Smaller projects can be funded with a personal loan or HELOC.
- Interest Rates: Compare fixed vs variable interest and shop around for the best deal. Home equity loans, for example, often have lower rates than personal loans.
- Repayment Terms: A longer repayment term usually means lower monthly payments but could accrue more interest over time. Personal loans have shorter terms.
- Home Equity: If you have a good amount of equity in your home, a home equity loan or HELOC may be the best choice.
- Credit Score: Some personal loans and government-backed loans require good credit standing to secure the best rates.
- Flexibility: A HELOC provides some flexibility for projects with variable costs. A lump sum home equity loan or RenoFi loan is good for larger projects.
Why Homeowners Love RenoFi Loans
RenoFi loans are becoming increasingly popular among homeowners and contractors alike. The ability to borrow based on your home’s after-renovation value is a game-changer, especially if you haven’t built enough equity to use a traditional HELOC or home equity loan. Here’s why more people are turning to RenoFi:
- Increased Borrowing Power: Traditional loans often limit you to borrowing up to 80% of your current home value. Alternatively, RenoFi allows you to borrow up to 125% of your home’s current value or 90% of its future value, whichever is lower. This means more money for your renovation project without the need to refinance.
- No Need to Refinance: With RenoFi loans, you can keep your existing mortgage and its low rate intact while accessing funds for your renovation. This is a huge benefit if you’re locked into a favorable rate and don’t want to refinance.
- Streamlined Process: Unlike other loans, RenoFi loans don’t require complicated draw schedules and inspections. This makes it easier to start and complete your project on time.
Conclusion
Choosing the right home renovation loan can make or break your project. While traditional loans like HELOCs, personal, and FHA 203(k) loans have their place, they often come with limitations that can restrict your renovation plans. But RenoFi loans give homeowners a unique and flexible alternative.
By leveraging your home’s after-renovation value, RenoFi allows you to borrow more without the need to refinance your existing mortgage or deal with complex draw schedules and inspections. Therefore, if you are a homeowner looking to maximize your renovation potential, RenoFi loans are the best choice.
Unlike traditional loans, which are based on your current home value or require you to refinance, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.
Explore your RenoFi loan options here.
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