Home Remodel Loans: What You Need To Know

Home remodeling enhances your home’s function, comfort, and value but often requires significant investment. While some pay with savings, many rely on financing. Traditional loans like home equity loans and HELOCs depend on existing equity, limiting borrowing power—especially for recent buyers. RenoFi offers a solution by using your home’s post-renovation value, allowing access to larger loans without refinancing.

Why Do Homeowners Need Remodel Loans?

Home remodel loans are financing options designed to help homeowners undertake significant renovations, structural modifications, or large-scale home upgrades. These loans provide the necessary capital for projects that go beyond minor cosmetic improvements, allowing homeowners to enhance the functionality, efficiency, and overall value of their homes. 

Unlike simple home improvement loans, which are often used for smaller-scale upgrades like repainting, fixture replacements, or small landscaping jobs, home remodel loans are tailored for major undertakings such as kitchen overhauls, bathroom expansions, home additions, basement finishing, and even full structural modifications.

Remodeling a home can be expensive, often requiring significant funding. While some use savings, many opt for home remodel loans to spread costs while preserving cash flow. 

These loans not only finance upgrades but can also boost property value and speed up resale. For growing families, remodeling offers a cost-effective alternative to moving. In short, home remodel loans provide a smart way to enhance your home without upfront financial strain.

Types of Traditional Home Remodel Loans

When it comes to financing major home renovations, homeowners have several loan options to choose from. Each type of home remodel loan comes with its own eligibility requirements, borrowing limits, interest rates, and repayment structures. Understanding the differences between these loans can help homeowners select the best financing option for their specific remodeling needs.

1. Home Equity Loans

A home equity loan allows homeowners to borrow a lump sum of money using the equity they have built up in their home. Equity is the difference between the home’s current market value and the remaining mortgage balance. Lenders typically allow homeowners to borrow up to 80% of their home’s appraised value minus what they still owe on their mortgage.

• Best for: Homeowners with significant equity who need a large amount upfront.
• Pros: Fixed interest rates, predictable monthly payments, and long repayment terms.
• Cons: Requires sufficient existing equity; high closing costs similar to those of a mortgage; if home values drop, homeowners could owe more than the house is worth.

2. Home Equity Line of Credit (HELOC)

A HELOC is similar to a home equity loan but functions more like a credit card. Instead of receiving a lump sum, homeowners are given a line of credit they can draw from as needed during the draw period, which usually lasts 5 to 10 years. During this time, they may only need to pay interest. Once the draw period ends, they begin repaying the principal plus interest over a repayment term of 10 to 20 years.

• Best for: Homeowners who want flexible access to funds over time.
• Pros: Can withdraw funds as needed; often lower interest rates compared to unsecured loans.
• Cons: Variable interest rates can increase costs over time; requires home equity; payments increase after the draw period ends.

Here is what to expect when using a conventional HELOC on a recent home purchase:

• 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)

What does this mean? Since you can only borrow up to 80% of your home value with a traditional HELOC, you will be unable to borrow the amount you need to complete your renovations. 

Instead of only using the equity you have currently, RenoFi lets you use the after-renovation value and you get it as a lump sum amount at a fixed interest rate. 

So, using the example we have already provided above, here’s what it would look like when using RenoFi. For our example, we will assume your renovations will add up to $150,000 of value to the home. 

• $750,000 * 90% = $675,000 (90% of Total Home Value)
• $675,000 - $480,000 = $195,000 (RenoFi Home Equity Line of Credit Amount)

With a RenoFi HELOC, your loan amount increased to $195,000 (4.25x more) and is enough to cover all of your renovations. This is because the loan is written against your ARV instead of based on your current equity. 

You have 10 years to use the credit line, and this is the interest-only period. Your repayment term is 15 years. In addition to much higher borrowing limits, there are no draw periods or inspections, and you don’t have to give up your original loan. 

3. Cash-Out Refinancing

A cash-out refinance replaces the existing mortgage with a new, larger loan. The homeowner borrows more than what they currently owe and receives the difference in cash to fund their remodeling project. The new mortgage comes with new loan terms, which could include a different interest rate and loan duration.

• Best for: Homeowners who want to take advantage of lower interest rates while accessing renovation funds.
• Pros: May offer lower interest rates than personal loans; funds can be used for any purpose.
• Cons: Requires refinancing the entire mortgage; closing costs can be high; losing a lower existing mortgage rate can make this option less attractive.

With a RenoFi cash-out refinance, however, you can have access to a larger amount of cash based on your ARV. 

Here is an example of a traditional cash-out refinance based on a recent home purchase, assuming you have paid down 10% of your mortgage:

• Home price: $600,000

• Current Mortgage Amount: $420,000

• 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)

On the other hand, with a RenoFi cash-out refinance, you can have access to a larger amount of money based on the after-renovation value of the home.

• 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)

In this example, RenoFi allows you to borrow against the $750,000 rather than the $600,000. This puts more cash in your pocket for your renovations compared to a traditional cash-out refinance that doesn’t consider your ARV. 

4. FHA 203(k) Rehab Loans

An FHA 203(k) loan, backed by the Federal Housing Administration (FHA), is specifically designed for homebuyers or homeowners who need to finance both the purchase of a home and its renovations. These loans are ideal for buying fixer-uppers or homes that require extensive repairs.

• Best for: Homebuyers purchasing a home in need of renovation or homeowners refinancing to fund major repairs.
• Pros: Low down payments; allows borrowers to finance both home purchase and renovation in one loan.
• Cons: Strict requirements on the types of renovations allowed; more complex application process; requires FHA mortgage insurance.

5. Personal Loans for Home Remodeling

Personal loans are unsecured loans that do not require homeowners to use their property as collateral. Instead, approval is based on creditworthiness, income, and other financial factors. These loans generally have shorter repayment terms (2 to 7 years) and higher interest rates compared to secured loans like home equity loans or HELOCs.

• Best for: Homeowners without sufficient home equity or those who prefer not to use their home as collateral.
• Pros: No collateral required; fast approval process.
• Cons: Higher interest rates; lower borrowing limits than secured loans.

Why RenoFi Loans Might Be the Right Choice

Unlike traditional loans that limit borrowing power based on existing equity, RenoFi loans allow homeowners to borrow based on the home’s post-renovation value. This means that instead of being restricted by current home equity, homeowners can secure funding that reflects the increased value of their home after renovations are completed.

RenoFi loans work as a second mortgage, meaning homeowners do not have to refinance their existing mortgage—a huge advantage for those who have locked in a low interest rate. RenoFi also provides renovation underwriting, which includes a project feasibility study and contractor due diligence to ensure that the remodel is financially and structurally sound.

• Best for: Homeowners who need more borrowing power and don’t want to refinance their current mortgage.
• Pros: Based on post-renovation home value; access to higher loan amounts; no need to refinance; flexible loan terms.
• Cons: Requires detailed renovation plans and contractor approval.

The Challenges and Limitations of Traditional Home Remodel Loans

While traditional home remodel loans such as home equity loans, HELOCs, and cash-out refinancing have long been used to finance renovations, they come with several limitations that may hinder homeowners from accessing the full amount they need for major remodeling projects. These challenges can make it difficult for homeowners to complete large-scale renovations without cutting corners, delaying projects, or seeking additional sources of funding.

Limited Borrowing Power

One of the biggest drawbacks of traditional remodel loans is that they base borrowing limits on a home’s current market value and existing equity. Homeowners who recently purchased their property or haven’t built enough equity may find that they can’t borrow enough to complete their renovation. Even those with substantial equity may be capped at 80% to 85% of their home’s current value, leaving them short on funds for expensive remodels.

High Closing Costs & Fees

Home equity loans and cash-out refinancing come with closing costs that can range from 2% to 5% of the loan amount, adding significant upfront expenses. Refinancing an entire mortgage just to access funds for a remodel may not always be financially beneficial, especially when current interest rates are higher than the homeowner’s existing rate.

Loss of Favorable Mortgage Rates

A homeowner with a low interest first mortgage may not want to refinance through a cash-out refi, as this could result in a higher interest rate on their entire mortgage balance. Losing a favorable rate could lead to thousands of dollars in additional interest payments over time.

Longer Approval Process & Stricter Requirements

Many traditional loans require extensive paperwork, a high credit score, proof of income, and a strong debt-to-income ratio. In addition, cash-out refinancing can take weeks or months to process, delaying much-needed renovations.

These challenges highlight the need for alternative financing options, such as RenoFi loans, which allow homeowners to borrow based on their home’s post-renovation value, providing significantly more funding while eliminating the need to refinance an existing mortgage.

Why RenoFi Is a Game-Changer for Home Remodel Loans

Traditional home remodel loans often limit borrowing power, require homeowners to refinance their existing mortgage, or demand significant home equity to qualify. RenoFi loans revolutionize the way homeowners finance major renovations by leveraging the ARV rather than the home’s current market value. This innovative approach allows homeowners to secure significantly larger loan amounts without the constraints of traditional lending methods.

Borrow More With After-Renovation Value (ARV)

Unlike home equity loans or HELOCs, which base loan amounts on current home equity, RenoFi loans consider what your home will be worth after renovations are completed. Homeowners can borrow up to 90% of the ARV or 125% of their home’s current value, whichever is lower. This gives more financial flexibility, especially for those who recently purchased their home or have limited equity.

No Need to Refinance Your Existing Mortgage

Refinancing can be costly, especially for homeowners who are locked into a low interest rate on their first mortgage. RenoFi loans act as a second mortgage, meaning homeowners keep their existing mortgage and interest rate while still accessing substantial renovation funds.

Renovation-Focused Underwriting for Security & Feasibility

RenoFi incorporates renovation underwriting, which includes project feasibility assessments and contractor due diligence. This ensures that renovation projects are financially sound and realistic, protecting both the homeowner and the lender.

In a nutshell, by removing the restrictions of traditional loans and maximizing borrowing power, RenoFi makes it possible for homeowners to fully fund their dream remodels without financial setbacks or unnecessary refinancing.

How to Choose the Right Home Remodel Loan

Selecting the right home remodel loan requires careful evaluation of your financial situation, renovation goals, and long-term homeownership plans. Since different loans offer varying borrowing limits, interest rates, and repayment terms, it’s essential to understand which option aligns best with your needs. 

Below are key factors to consider when choosing the best financing solution for your home renovation project.

Assess Your Home Equity

Traditional home equity loans and HELOCs require homeowners to have sufficient built-up equity in their homes. If you’ve owned your home for several years and its value has appreciated, tapping into that equity might be a viable financing option. However, if you recently purchased your home or have limited equity, options like RenoFi loans may provide better borrowing power.

Determine Your Loan Amount Needs

The size and scope of your remodel project will influence which loan makes the most sense:

• Smaller-scale remodels ($20,000 - $50,000): HELOCs and personal loans may suffice.
• Larger-scale renovations ($50,000 - $250,000+): Home equity loans, cash-out refinancing, or RenoFi loans offer better solutions.

If traditional loans don’t provide enough funds due to limited equity, RenoFi loans allow you to borrow based on your home’s future value after renovations.

Consider Loan Terms & Interest Rates

• Fixed vs. Variable Rates: Home equity loans typically have fixed rates, while HELOCs and some personal loans have variable rates that can fluctuate.
• Repayment Term Length: Longer repayment terms reduce monthly payments but may increase total interest costs.

Decide If You Want to Refinance

Refinancing through a cash-out refinance may be an option if current mortgage rates are favorable. However, if you already have a low interest mortgage, a RenoFi loan allows you to keep your existing rate while still securing the funds you need for remodeling.

By evaluating these factors, you can confidently select a loan that maximizes your borrowing power, minimizes costs, and aligns with your financial goals.

Applying for a RenoFi Loan

The application process for a RenoFi loan is designed to ensure homeowners can secure the funding they need for their remodel while maintaining financial stability. Unlike traditional home remodel loans, which primarily consider current home equity, RenoFi loans are based on the post-renovation value (ARV), allowing for greater borrowing potential. 

Below is a step-by-step guide to applying for a RenoFi loan:

Submit Your Renovation Plans

To determine the loan amount, RenoFi requires detailed renovation plans, including contractor estimates, blueprints, and an itemized budget. This step ensures that the projected increase in home value is realistic and aligned with market conditions.

Home Appraisal Based on After-Renovation Value (ARV)

Unlike traditional loans that use the home’s current market value, RenoFi arranges for a specialized ARV appraisal to assess how much your home will be worth after the renovation is completed. This step determines your maximum borrowing power.

Renovation Underwriting & Contractor Due Diligence

RenoFi conducts renovation underwriting, which includes reviewing the feasibility of the project and conducting a contractor due diligence check. This ensures that both the budget and scope of work are sound before loan approval.

Final Loan Approval & Funding

Once underwriting is complete, the lender finalizes the loan terms, and funds are disbursed to begin the renovation process. Since RenoFi loans act as a second mortgage, homeowners retain their existing mortgage while benefiting from the additional funds.

By following these steps, homeowners can secure higher loan amounts without refinancing, making RenoFi a flexible and cost-effective solution for home remodeling projects.

Why RenoFi Stands Out

When financing a major home remodel, homeowners often face limitations with traditional loan options such as home equity loans, HELOCs, or cash-out refinancing. These conventional methods restrict borrowing power based on a home’s current value and available equity, making it difficult for homeowners—especially those who recently purchased their homes or lack significant equity—to secure the full amount needed for their renovation projects.

RenoFi offers a ground-breaking alternative financing solution that helps homeowners unlock more borrowing power without refinancing their existing mortgage. By leveraging the post-renovation value (ARV) of the home, RenoFi allows borrowers to access larger loan amounts, making it possible to complete major remodeling projects without compromising on design, materials, or scope.

Key Advantages of RenoFi Loans:

• Higher Borrowing Power: Traditional loans are based on current home equity, but RenoFi loans use 90% of the home’s future value (ARV) or 125% of the current home value, whichever is lower. This allows homeowners to borrow significantly more than traditional loan options.
• No Need to Refinance: Unlike cash-out refinancing, RenoFi loans are structured as a second mortgage, enabling homeowners to keep their existing mortgage and interest rate while still accessing the funds needed for their remodel.
• Renovation Underwriting for Added Security: Every RenoFi loan undergoes renovation underwriting, which includes project feasibility studies and contractor due diligence, ensuring that the planned remodel is realistic, cost-effective, and financially sound.

By eliminating the financial constraints of traditional loans and maximizing borrowing potential, RenoFi empowers homeowners to take on larger remodels with confidence, financial flexibility, and peace of mind.

The Smart Way to Fund Your Home Remodeling Projects

Home remodeling can be a life-changing investment, but it requires careful planning and the right financing. While traditional loans offer various options, RenoFi’s innovative approach makes it the ideal choice for homeowners looking to maximize their borrowing power and achieve their renovation goals. 

Whether you’re reimagining your kitchen, expanding your living space, or modernizing your entire home, RenoFi ensures you have the financial support to bring your vision to life, and you will have 11x more borrowing power. 

Ready to transform your home? Explore RenoFi’s unique loan options today and take the first step toward your dream remodel.