Types of Loans for Home Renovation: What You Must Know

Types of loans for home renovation projects refer to the various financing options available to homeowners looking to fund improvements, repairs, or upgrades to their property. 

These loans include home equity, HELOCs, cash-out refinances, personal, FHA 203(k), and RenoFi. Through these loans, you can undertake home renovation projects that can significantly enhance your property’s comfort, functionality, and value. 

One of the biggest challenges homeowners face when planning a home renovation is securing the right financing. While traditional options like construction and home equity loans are well-known, many homeowners aren’t aware of RenoFi loans. This unique alternative can provide greater borrowing power and flexibility without the need to refinance their existing mortgage and give up what could be a lower interest rate. 

In this guide, we’ll explore the different types of loans available for home renovation projects and explain why RenoFi loans might be the better option.

1. Home Equity Loan

Often referred to as a second mortgage, a home equity loan is a common choice for financing home renovations. It allows you to borrow against the equity you’ve built in your home.

How It Works

You receive a lump sum payment that you repay over a set term with a fixed interest rate. For this type of loan, the amount you can borrow is usually determined by your home’s current value minus the amount you still owe on your mortgage.

Benefits

• Fixed interest rates
• Lump sum payout

Drawbacks

• Equity requirement
• Risk of foreclosure

2. Home Equity Line of Credit (HELOC)

Many homeowners also consider a HELOC when financing renovations. Instead of receiving a lump sum like a home equity loan, a HELOC is like a credit card. You can withdraw money whenever you need it, up to a specified limit, during the draw period.

How It Works

HELOCs often have variable interest rates, which means your payments can fluctuate over time. They are usually divided into a draw period and a repayment period. Fixed rates mean the interest rate is locked. in. 

This is how it works: You can borrow money as needed during the draw period. After the draw period is over, you’ll start paying back the principal balance and interest.

Benefits

• Flexible access to funds
• Interest-only payments

Drawbacks

• Variable interest rates
• Market fluctuations

Example of RenoFi Benefits for HELOC Borrowers

Imagine your home is valued at $500,000 and has a $400,000 mortgage balance. You plan to renovate it to raise its value to $640,000. Usually, with your current loan-to-value (LTV) ratio of 80%, you couldn’t borrow anything for your renovation. 

However, with a RenoFi loan, you could borrow up to $176,000 by leveraging your home’s after-renovation value. This gives you much greater borrowing power than a traditional HELOC. 

3. Cash-Out Refinance

A cash-out refinance allows you to refinance your existing mortgage into a new one and receive a lump sum of cash. This can be helpful if you need money for renovations, debt consolidation, or other expenses. 

How It Works

You replace your existing mortgage with a new one at a higher amount, which provides you with cash for your renovations. The new loan has a fixed interest rate, and you repay it just like any other mortgage.

Benefits

• Lower interest rates
• Larger loan amounts

Drawbacks

• Closing costs
• Risk of losing your home

4. Personal Loans

Personal loans are an unsecured loan option for home renovations. Homeowners can easily qualify for these loans since they are not required to use their homes as collateral. However, they come with higher interest rates than secured loans.

How It Works

You borrow a fixed amount from a bank or credit union and repay it with a fixed interest rate over a set term. Personal loans don’t require any equity in your home, so they are a good option, especially if you are a new homeowner or don’t want to use your home as collateral.

Benefits

• No collateral required
• Quick disbursement

Drawbacks

• Higher interest rates
• Shorter repayment terms

Why Traditional Options Might Not Be Enough

While these traditional loan options can be helpful, they often have limitations. For instance, borrowers must have substantial equity built up in their homes or be forced to refinance their mortgage, potentially losing their current low interest rate.

Moreover, the borrowing limits based on your home’s current value may not be sufficient to cover extensive renovations, especially for projects that could significantly increase your home’s value in the future.

Introducing RenoFi Loans: A Smarter Way to Fund Home Renovations 

For many homeowners, traditional financing options like home equity loans and HELOCs aren’t viable due to a lack of equity. This is where RenoFi loans come in. 

RenoFi loans provide a smarter solution, allowing you to leverage the future value of your home post-renovation. Thus, you can borrow more money without refinancing your primary mortgage. This innovative solution is perfect for homeowners who want to finance large renovation projects without giving up their current low mortgage rate.

How RenoFi Loans Work

RenoFi loans are based on the after-renovation value (ARV) of your home, which considers its future worth after the renovations are completed.

For instance, if your home is currently valued at $500,000 and your outstanding mortgage balance is $400,000, a traditional loan might not offer any borrowing power. 

However, if your renovation is expected to increase your home’s value to $640,000, a RenoFi loan would allow you to borrow up to $176,000, leveraging the increased equity from the renovation.

Key Benefits of RenoFi Loans

• No Need to Refinance: With a RenoFi loan, you can keep your current mortgage and low interest rate while getting the funds you need for your home renovation.
• Increased Borrowing Power: RenoFi loans let you borrow up to 90% of your home’s future value, which is calculated based on the expected increase in your home’s value after renovations are completed.
• No Draws or Inspections: Unlike traditional construction loans that require a series of draws and inspections throughout the renovation process, RenoFi loans provide a simpler, one-time funding solution.
• Contractor-friendly: Contractors love RenoFi loans because they provide quick and reliable funding. This allows projects to start on time and progress without financial hiccups.

Other Types of Loans for Home Renovation Projects 

• Federal Housing Administration (FHA) Title I Property Improvement Loans
• Energy-Efficient Mortgages (EEMs)
• FHA 203(k) Rehab Loans 

RenoFi Loans – The Smartest Way to Finance Home Renovations

While traditional loans like HELOCs, home equity, and cash-out refinances have their place, they aren’t always the best fit for significant renovation projects.

Fortunately, RenoFi loans offer a smarter, more flexible solution by allowing you to borrow against the future value of your home. This enables you to access more significant loan amounts, keep your existing mortgage rate, and simplify the renovation financing process.

If you’re planning a home renovation and want to explore your options, consider RenoFi loans as the most effective way to fund your project. Learn more and get started with your RenoFi loan here.