Home Loan for Renovation: Your Guide to the 8 Best Options

A home loan for renovation is a comprehensive term referring to several types of loans used to finance home renovation and improvement projects. It is also known as a home improvement loan. Whether you are looking to install a new roof, make energy efficiency improvements, or remodel your bathroom, this is the financing option for you. 

This article offers a comprehensive guide to home renovation loans, how they work, the different types of home renovation loans, their advantages and disadvantages, and everything in between.

Benefits of Home Loan for Renovation

Home loans for renovations offer several advantages compared to traditional financing methods. These include:

• Helping you build equity faster as they significantly improve your home’s value.
• Helping homeowners avoid depleting their savings or stretching their credit cards to the limit to fund the required repairs and improvements.
• Adding to your home value, making it an investment that might pay off in the long run.
• Offering competitive interest rates and flexible repayment terms

Types of Home Loans for Renovation

1. Personal Loan for Home Renovation

Personal loans are the most popular types of home improvement loans. While home improvements and debt consolidation are their most common uses, these loans can be used to pay for just about anything. Personal loans are unsecured, meaning they are not tied to any collateral. 

In other words, a lender cannot take your house or any other collateral should you default on your loan repayment. However, this can significantly ruin your credit, and your lender can find more stringent measures to recover the debt. 

Usually, personal loans are granted as lump sums, mostly within a day or two. That said, this might not be the best option for homeowners who are DIYing their home renovations over time or who have major renovations in mind. 

2. Cash Out Refinancing

Cash out refinancing involves replacing your existing mortgage and replacing it with another one of higher value. Once approved, you will receive the difference between the new loan amount and the outstanding mortgage debt in cash. You can then use the cash to cover your home renovation project. 

Please note that the new mortgage comes with new interest. If the mortgage interest rates are higher today than when you originally took the mortgage, you might end up paying much more interest on your new loan.

3. RenoFi Cash Out Refinancing

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.

Let’s imagine a scenario where you want to spend $150,000 to renovate your new home and 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 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

4. FHA 203 (k) Loans for Home Renovation

FHA loans are quite popular in home improvement projects, especially for homeowners with a lower down payment and credit score. They are backed by the federal government and insured by the Federal Housing Administration, offering competitive interest rates and flexible repayment terms. FHA loans can be used to finance a wide range of home renovations, including kitchen and bathroom updates and accessibility improvements.

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.

5. Home Equity Lines of Credit (HELOC)

Here is another way of financing your home improvement projects using your home’s equity. A HELOC, unlike home equity loans, is more of a credit card. Generally, a homeowner can conveniently withdraw cash against your home equity with variable or fixed interest rates. HELOC loans are secured by your home. 

You can borrow up to 85% of your home’s market value, less the total amount you still owe on the mortgage. This can be a great option if you have built a substantial amount of equity into your home and require a large amount of money to facilitate extensive renovation projects you have on your list. To be eligible for this type of financing, most lenders prefer clients with at least 20% equity in their homes. 

6. RenoFi Home Equity Line of Credit (HELOC)

RenoFi also offers a HELOC product that is similar to a traditional HELOC, but uses the after renovation value of your home.

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

7. Home Equity Loans

A home equity loan allows a homeowner to borrow against their home’s equity. This option is ideal for people whose mortgage balance is considerably lower than their home’s value. 

The home equity loan is received as a lump sum, has a fixed rate, and is typically repaid in 5 to 30 years. Because your loan is secured by your home, the interest rates might be relatively lower compared to unsecured loans. However, defaulting on your payment can come with serious consequences, such as foreclosure in worst-case scenarios.

The tricky part about home loans for renovations is understanding how equity works and how homeowners can use it to borrow against your home. Equity means how much of your home you own. 

8. RenoFi Home Equity Loans

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.

Conclusion

RenoFi is the smartest way to finance your home renovation project, tackle everything on your wish list and transform your home into a safe, happy haven. Unlike traditional loans, it considers the after-renovation value rather than the current value of your home, ensuring high borrowing power at the most competitive rates. 

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.

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.