{"id":21245,"date":"2021-01-29T11:59:06","date_gmt":"2021-01-29T19:59:06","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=21245"},"modified":"2026-04-03T06:42:30","modified_gmt":"2026-04-03T13:42:30","slug":"home-renovation-loan","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/home-renovation-loan\/","title":{"rendered":"Planning a Remodel? Know Your Home Renovation Loan Options"},"content":{"rendered":"

In 2020, the average American household spent $8,305 on home improvements<\/a> \u2014 that\u2019s almost the exact amount the average household has in their savings account<\/a>, according to Bankrate\u2019s recent analysis of data from the Federal Reserve.<\/p>\n

But rather than draining their savings, most homeowners opt to finance their home home improvement with credit or a home renovation loan<\/a>. A recent survey by Discover Home Equity Loans reveals that 23% of homeowners plan to pay for their renovation with a credit card, 18% with a home equity line of credit (HELOC), 13% with a home equity loan, and 7% with cash-out refinance<\/a>.<\/p>\n

If you\u2019re considering taking out a home renovation loan to spruce up a powder room or gut the kitchen, we\u2019ve got you covered. Our expert-backed primer unpacks the array of renovation loan options available today and how they impact your future home sale. We\u2019ll also share tips on how to focus on remodeling projects that add value to your home<\/a> to help you recoup your investment.<\/p>\n

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<\/a> Source: (Lukas \/ Pexels)<\/figcaption><\/figure>\n

An overview of home renovation loan options<\/h2>\n

If you\u2019re interested in taking out a home renovation loan, you\u2019ve got options. Here\u2019s an overview of the most common home renovation loans available:<\/p>\n

Cash-out refinance<\/h3>\n

With this option, the borrower refinances<\/a> their existing mortgage<\/a>, and the lender advances an additional amount in cash for the renovation project<\/a>. Typically, lenders will allow homeowners to refinance 80% to 90% of the property\u2019s value<\/a>.<\/p>\n

You might consider this option if you have at least 20% equity in the property and a strong credit score, plus can secure an interest rate lower than your current one. A major upside with a cash-out refinance is that it\u2019s a standard first mortgage loan, not a secondary lien or line of credit.<\/a><\/p>\n

Construction loan<\/h3>\n

Homeowners can use a construction loan to cover land, building labor and materials, permitting, and other relevant expenses for residential properties. These are short-term loans (usually about a year) with higher interest rates. To qualify for a construction loan<\/a>, you\u2019ll need to provide the lender the detailed project plans, background on the licensed contractor managing the project, at least 20% equity in your home, and proof of your ability to repay the loan (proof of income and good credit history).<\/p>\n

Owner-builder construction loan<\/h3>\n

If you plan to build your own home, an owner-builder loan<\/a> is the loan for you. Lenders see these borrowers as higher risk (their projects can take longer and encounter more problems), so these loans may be harder to qualify for<\/a>. You\u2019ll need to demonstrate a detailed construction plan with costs to show you\u2019re competent to complete the job.<\/p>\n

While these loans come with a higher interest rate, you can recoup the cost if your completed project adds value to your home; plus, you\u2019ll likely make up for the higher interest with your savings from forgoing a contractor.<\/p>\n

Home equity loan and HELOC<\/h3>\n

Home equity financing enables homeowners with equity to access cash from their homes<\/a> for renovations (or other needs). Typically, these types of loans that allow you to tap into your equity require a second lien (or \u201csecond mortgage\u201d) in addition to your existing mortgage. Since these loans are secured against your equity in the house, lenders might offer lower rates than they would for a personal loan.<\/p>\n

A regular home equity loan<\/b> works very similarly to your standard mortgage. The money borrowed against the equity in your home comes as a one-time, lump sum and typically with a fixed interest rate. You\u2019ll typically need at least 10% equity in your primary home or 20% for an investment property to qualify.<\/p>\n

A HELOC \u2014 short for \u201chome equity line of credit<\/a>\u201d \u2014 is a revolving line of credit that you can draw from as needed, sort of like a credit card. With a HELOC, you\u2019ll be approved for a line of credit equal to your maximum draw amount, but it\u2019s not paid as a lump sum. Instead you will be able to withdraw money from the account as you need it, much like a credit card, but this debt is secured by our home. The upside to HELOCs is their flexibility in using the funds how and when you want, and the fact that you only need to pay interest on the money you\u2019ve drawn from the account. Plus, HELOCs may have a few unique tax advantages for the savvy homeowner.<\/p>\n

Government loans<\/h3>\n

Why would the government want to help fund your remodeling project? Well, because when property values rise, the community and local economy benefit<\/a>, as well. So the government offers low-interest loans with tax relief benefits and other incentives to encourage homeowners to improve their homes.<\/p>\n

But don\u2019t expect Uncle Sam to back your dream of building a super custom Star Trek basement. To qualify, you must prove that you will use the loan on a project proven to appreciate your home\u2019s value. Here\u2019s an overview of the two most common government home renovation loans:<\/p>\n