A home equity line of credit (HELOC) and home equity loan refer to two different types of financial products that allow homeowners to borrow against the equity they’ve built up in their homes. Most individuals consider these common traditional options when planning a home renovation. 

However, these solutions often come with limitations that may not fully meet the needs of a significant renovation project. Many don’t realize that there’s an option that provides more borrowing power and flexibility: RenoFi loans.

RenoFi loans are a unique financing option specifically designed for major home renovations. They consider the after-renovation value of your home rather than its current value, unlocking up to 11x more borrowing power than traditional loans. In this guide, we’ll compare HELOCs, home equity, and RenoFi loans, helping you make an informed decision.

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What Is a Home Equity Line of Credit (HELOC)?

A home equity line of credit (HELOC) is a revolving credit line based on the amount of equity you’ve built up in your home. Much like a credit card, a HELOC allows you to borrow funds up to a specific limit when you need them. However, instead of receiving a lump sum, you can borrow multiple times over a set period, known as the draw period.

This flexibility makes HELOCs an appealing choice for homeowners who need ongoing access to funds or are unsure of their project’s total cost upfront.

Unlike a home equity loan, HELOCs usually have a variable interest rate, meaning your payments can fluctuate based on market conditions. Most HELOCs have a draw period of 10 years, during which you can borrow and repay multiple times, followed by a repayment period of 10 to 20 years, where you can no longer borrow and must pay back the outstanding balance.

RenoFi HELOC vs. Traditional HELOC

HELOCs give you flexibility, so they are a great choice for projects where you’re unsure of the total costs upfront. However, with traditional HELOCs, the amount you can borrow is tied to your home’s current value. This can be limiting, especially if you haven’t built much equity yet. That’s where RenoFi HELOCs stand out.

With RenoFi HELOCs, your borrowing power is determined by how much your home will be worth after the renovations. This lets you access more funds to complete your project.

Key Differences

  • Borrowing Basis: RenoFi lets you borrow based on your home’s future value after renovations, so you have access to more funds. Traditional HELOCs rely on your home’s current value, which limits how much you can borrow.
  • Access to Funds: With RenoFi, you can access the entire approved amount upfront at closing, so you have everything you need for your project right away. Traditional HELOCs only let you draw funds as needed during a set period.
  • Interest Rates: RenoFi lets you choose between fixed and variable rates. In contrast, traditional HELOCs usually feature variable rates that can fluctuate based on market conditions, though some may offer fixed-rate options.
  • Flexibility: Both options provide flexibility, but RenoFi stands out with its higher borrowing limits, making it great for major renovations. Traditional HELOCs are better suited for smaller, ongoing needs.

What Is a Home Equity Loan?

A home equity loan, or second mortgage, is like getting a cash advance against your house. Unlike a HELOC, which provides flexible borrowing, a home equity loan gives you a one-time payment that you repay over a fixed period at a fixed interest rate. 

One of the advantages of a home equity loan is its fixed interest rate, which guarantees predictable monthly payments. Therefore,  a home equity loan can be an effective financial tool if you need a lump sum of funds for specific projects, such as large-scale renovations or debt consolidation.

RenoFi Home Equity Loan vs. Traditional Home Equity Loan

Although traditional home equity loans have fixed rates and steady monthly payments, they’re limited to the equity you’ve already built in your home. RenoFi home equity loans work differently by factoring in what your home will be worth after renovations. This lets you borrow more without refinancing your primary mortgage or losing a low interest rate.

Key Differences

  • Borrowing Power: Traditional home equity loans are based on your current home equity, while RenoFi loans consider your home’s after-renovation value. This gives you access to significantly more funds.
  • Interest Rates: Both options offer fixed rates, however, RenoFi loans give you the advantage of higher borrowing limits.
  • Lump Sum: With both loans, you’ll receive the full amount upon closing, and with RenoFi even though the loan is based on the future value of the property, you still get the full amount upfront.
  • Best For: If you already have enough equity, traditional home equity loans might be a good fit for your project. On the other hand, RenoFi home equity loans are a smarter option for renovations that go beyond your current equity.
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The Challenge of Limited Equity

Both home equity loans and HELOCs require that you have enough equity built up in your home, generally at least 15 to 20%. This can be a challenge if you’ve recently purchased your property or if home prices in your area have stagnated. In these situations, tapping into enough equity to fund large renovation projects may not be possible with traditional options.

When financing a large renovation or costly improvements, home equity loans may have limitations such as rigid structure, limited borrowing power, and lack of flexibility. 

Likewise, when using a HELOC for renovations, be aware of potential downsides like interest-only payments, variable interest rates, and uncertain borrowing power.

How RenoFi Loans Solve the Equity Challenge

If you’re planning a large home renovation but don’t have significant equity built up, RenoFi loans offer a smarter way to finance your project. Unlike traditional HELOCs or home equity loans, RenoFi loans are based on your home’s after-renovation value (ARV), allowing you to borrow more by factoring in the increased value of your home post-renovation.

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.

Let’s imagine a scenario where you want to borrow $150,000 to make renovations to your home that you believe will increase the value of your home by $150,000.

Scenario 1 (New Home Purchase): 

  • 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). 

By using the after-renovation value (ARV) instead of your current home value, RenoFi loans dramatically increase your borrowing power. This makes it easier to finance large renovations without refinancing your entire mortgage or giving up your low interest rate.

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
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When to Choose a HELOC, Home Equity Loan, or RenoFi Loan

The best financing option for your home renovation will depend on your specific financial situation and the scope of the project.

  • Home Equity Loan: If you have significant equity in your home and need a one-time payment for a large renovation project, a home equity loan might be the best option.
  • HELOC: This financial option is suitable if you need ongoing access to funds and prefer flexible repayment options, particularly for projects with variable costs.
  • RenoFi Loan: A RenoFi Loan is a good option for homeowners planning a major renovation who need to borrow more than their home equity allows. It also benefits those who don’t want to refinance their existing mortgage. 

Choose RenoFi for Your Renovation Financing

The best financing option for your home renovation, whether it’s a HELOC, home equity, or RenoFi loan, will depend on your specific financial situation and the size of the project. A HELOC might be the way to go if you’re looking for flexibility, while a home equity loan could be ideal if you prefer stability and a lump sum.

However, suppose you’re planning a significant renovation and want to maximize your borrowing power, on average more than 11x, without refinancing your mortgage while keeping a low rate. In that case, RenoFi loans offer a more innovative solution.

Get started with your loan options today to explore your borrowing options and finance your dream home renovation without sacrificing your current low mortgage rate.

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By RenoFi Team Our dedicated team of Renovation Advisors, Loan Officers, and experts oversees our entire content production process to ensure it provides a high-level of authority and benefit to our website visitors. While all content has been thoroughly proofread and fact-checked to publication, we advise that it should be consumed for general informational purposes only.

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