Maybe you've always wanted a bigger kitchen, or a finished basement, or an en suite off the master bedroom. If you're like a lot of homeowners right now, moving isn't really on the table — not with a pandemic-era mortgage rate worth keeping. So you decide to renovate instead.
The catch is that renovations often cost more than what's sitting in savings. That's where a home equity loan comes in. If you've owned your home for a few years, you've likely built up a meaningful ownership stake. In fact, about 44.6% of mortgaged homeowners were considered equity rich as of Q4 2025, so there's a good chance you have money to work with.[1] With a home equity loan (HELOAN) or home equity line of credit (HELOC), you can borrow against that equity to fund your remodel.
Both products let you tap your equity without touching your existing mortgage rate — but they work differently, and the right choice depends on your project. This guide will walk you through how each one works, what to think through before you borrow, and how to set yourself up for a renovation that makes financial sense.
How does using home equity for a remodel actually work?
Equity is the difference between your home’s value and what you still owe on it. So if your home is worth $300,000 and you still owe $150,000 on your mortgage, you have $150,000 in equity. With a home equity loan, you can use a portion of that equity — typically up to 80-85% of it — to cover remodeling or other expenses.
The two main home equity products are HELOANs and HELOCs. A home equity loan (HELOAN) provides a lump sum payout that you repay over a set term at a fixed interest rate. With a HELOC, you can take out only as much money as needed during an initial draw period, after which you repay what you borrowed over a set term with a variable rate. Both loan products use your home as collateral.
HELOAN and HELOC rates are typically 2-4% higher than those for a traditional 30-year fixed mortgage, explains Taylor Lacy, loan officer at Edge Home Finance in Minnetonka, MN. That's because your primary mortgage lender gets the first claim to your property if you somehow default on your debts, making these loans riskier for lenders. Exact rates depend on your credit score, the loan amount, and your loan-to-value ratio.
As of March 2026, home equity loan rates are slightly higher than those for HELOCs (7.85% vs. 7.17%, respectively).[2][3] Rates for these products are typically similar, however, and they change often.[4] Be sure to check rates frequently as you’re considering your options.
Picking the right home equity product depends on the scope and timeline of your project.
Home equity loan or HELOC — which fits your project?
| HELOAN | HELOC | |
| Type of funding | One-time lump sum | Money taken out as needed during a draw period |
| Typical terms | Repayment terms vary but can last up to 30 years and repayment begins immediately | Draw period typically lasts 3-10 years, while repayment period lasts 10-20 years and begins once draw period ends |
| Interest rate | Fixed (stays the same) | Variable (subject to change based on market conditions) |
| Repayment | Predictable monthly payments over a set term | Payments may increase or decrease over a set term due to a variable rate; might require a balloon payment |
| Best for | A project with a set budget or any other use with a definitive cost | Phased projects, emergencies, projects with uncertain costs |
“A home equity loan provides a lump sum with a fixed interest rate — ideal for a one-time renovation like a kitchen remodel where you know the exact cost upfront,” says Michael G. Branson, CEO of All Reverse Mortgage. “A HELOC works like a credit line with a variable rate, better suited for ongoing projects where expenses unfold over time, such as a multi-phase home addition.”
Another important distinction is that a HELOC comes with a draw period, which varies by lender but can last up to 10 years. During the draw period, you can borrow as often and as much as you need to complete your home project, up to your borrowing limit. Once the draw period ends, so does your ability to borrow funds. Then, the repayment period begins and usually lasts 10-20 years.[5]
While a home equity loan has the benefit of predictable monthly payments, the downside is you can only borrow money once. With a HELOC, you can draw funds multiple times, but variable interest rates may make for unpredictable payments during the repayment period. “The trade-off is stability versus flexibility,” says Branson.
Branson also explains when one product might be better over the other for certain home projects: “If a homeowner needs $50,000 for a roof replacement, a home equity loan makes sense because the cost is fixed and predictable,” says Branson. “But for a year-long renovation with fluctuating contractor payments, a HELOC offers the flexibility to draw funds as needed.”
One point to consider with a HELOC is the draw minimum. “A lot of lenders do not allow for HELOC draws under $50,000,” says Lacy. “So if someone is looking for less than that, then one of the other loan options would likely be a better fit.”
Alex Olivera with Patriot Mortgage Group also notes that some HELOCs also have limited draw periods, ranging from 3–10 years, so you need to make sure it gives you enough time to complete your project.[6]
What will a home equity loan for a remodel actually cost you?
It happens all the time — renovations take longer and cost more than expected. And with interest, the overall costs of a HELOAN or HELOC will be more than the amount you’ll borrow.
Loan costs
Let’s say you need $80,000 to expand and remodel your kitchen.
For a home equity loan, the total cost will vary based on your interest rate and repayment term. With a 10-year repayment term, you’ll pay less in overall interest than you would for a 15-year term. But keep in mind that a faster repayment term comes with the tradeoff of higher monthly payments.
Here’s an example of how your total loan costs would differ with a 10-year vs. 15-year repayment terms on a HELOAN with a fixed 7.75% rate.
| Monthly payment | Total interest paid | Total loan cost | |
| 10-year term | $964 | $35,715 | $115,715 |
| 15-year term | $758 | $56,370 | $136,370 |
With a HELOC, the variable interest rate can significantly impact total loan costs. If rates rise or fall sharply, your monthly payment will change. Because of this, variable rates can be risky.
A Reddit user recently shared that at the time they got their HELOC for a home remodel, rates were 4%, but they’ve since jumped to 9%. They opted to pay down their balance as quickly as possible to avoid incurring substantial interest costs.[7]
Renovation costs
Simply put, home remodels aren’t cheap, and expenses can be unpredictable.
Seventy percent of homeowners went over their budget in their latest home renovation project, according to a recent survey of American property owners from Clever Offers.[8] Fifty-one percent said they’ve spent more on home renovations than they planned since they’ve owned their home.
When setting a renovation budget, it’s smart to factor in some cushion for costs that exceed estimates and any expensive surprises that pop up along the way, such as hidden structural issues or materials delays. Getting quotes from more than one contractor can also help you find the best price and better inform your budget.
Generally, contractors recommend including a contingency fund that’s 10-20% of your estimated project cost.[9][10][11] If, for example, you’ve received a $50,000 quote for finishing your basement, you’ll want to add a $5,000-$10,000 buffer to your budget.
Keep in mind: Estimating a budget is more important with a HELOAN, as you’ll get a one-time lump sum to cover your project. You don't automatically get to borrow more if you go over budget. With a HELOC, you can draw money as needed any time during the draw period, up to your maximum borrowing amount.
Why using a home equity loan for a remodel could be a good idea
Why a home equity loan? Why remodel your current home instead of upgrading to a new one? Leveraging your home equity for home improvements can be a good idea compared to alternatives for several reasons:
- Lower interest rates: Compared to unsecured debt alternatives like credit cards or personal loans, home equity loans have lower rates. As of March 2026, personal loans have an average interest rate of 12.25%, whereas home equity loans average 7.85%, according to Bankrate data.[2][12]
- Ability to keep first mortgage rate: Approximately 11% of homeowners cite not wanting to lose their mortgage rate as a top reason for holding off on selling their home, according to a recent Clever Real Estate survey of 779 American homeowners.[13] For homeowners who need cash for a remodel but don’t want to do a cash-out refinance and lose their current rate, a HELOAN would allow them to keep their first mortgage and its rate.
- Funds flexibility: You can use the funds from a home equity loan in any way you want, including for home projects. A HELOC also gives you more flexibility to only borrow as much cash as you need when you need it. Many people open HELOCs to have quick access to emergency cash.[14] This can be helpful to cover any urgent home repairs, such as a broken furnace, a leaky roof, or plumbing issues.
- Potential for high return on investment (ROI): Putting your equity toward a high ROI project, such as a kitchen remodel or an addition to your liveable square footage, can be a smart idea. For example, finishing a basement has about a 70% ROI, adding an average of $22,400 to your home value, according to Angi. Even when the ROI is below 100%, don’t discount the value of an increased quality of life that comes with beneficial upgrades and more living room.[15]
- Potential for tax benefits: Whether or not you can get tax benefits depends on how you use HELOAN or HELOC funds. “Interest on home equity loans and HELOCs is only tax-deductible if the funds are used to substantially improve your home, not for personal expenses like vacations or debt consolidation,” says Branson. You must also itemize your deductions to qualify.[16]
Risks of using a home equity loan for a remodel
It’s not all positives when it comes to choosing a home equity loan for home renovations. Here are potential risks to weigh before making your decision:
- Home is collateral: Before getting a home equity loan, be sure you can comfortably afford the extra monthly payment. Defaulting on the loan means you’re at risk of losing your home, so you don’t want to fall behind on payments. Lacy shares that many homeowners opt to refinance their HELOC once interest-only payments are over and payments begin to increase over time.
- Unpredictable payments: Because of the variable rate on a HELOC, there’s less predictability and stability with monthly payments. Rates are tied to the prime rate and can change considerably during a 10-year draw period. For example, a $60,000 draw HELOC with a 10-year term and 6.5% rate has a $681 monthly payment, while a 8.5% rate has a $744 monthly payment.[17] While that might not look like a huge difference, it adds up over time and can put a strain on your budget if you’re not prepared for rate changes.
- Renovations can add up: Not only can renovations costs go over budget but also finishing one project can make you want to refresh other home spaces — and to tap more of your equity to do so. Just remember: Whatever equity you borrow, you’ll need to pay back with interest. And the more equity you take out, the less ownership stake you’ll have in your home. “A lot of people bank on the value of their home increasing for retirement but if you continuously use the equity you gain over time then there won’t be much cash for you to get when you eventually sell,” says Olivera.
- May not recoup your investment: If you’re renovating to increase your home value with plans to sell soon after, keep in mind that not all upgrades result in a 100% ROI. For example, replacing a garage door has the highest ROI power. Homeowners who upgraded their garage door recouped an average of 268% of their costs, according to the 2025 Cost vs. Value Report published in the Journal of Light Construction.[18] A minor kitchen remodel has an average ROI of 113%, while a midrange bathroom remodel only has a 80% ROI.
- Might overimprove for your neighborhood: “Over-improving for your neighborhood means spending more on renovations than the local market will ever reward you for at resale,” says Branson. “If comparable homes in your area sell for $350,000, a $100,000 kitchen remodel won't push your sale price to $450,000 — buyers won't pay a premium that far exceeds neighborhood comps, leaving you unable to recoup your investment even in a strong market."
How much can you borrow for a remodel?
The amount of equity you can tap for a home remodel depends on a few factors:
- CLTV ratio: Your combined loan-to-value ratio (CLTV), which includes your first mortgage and the new loan, cannot exceed 80-85% of your home value. Some lenders might accept as high as 90%. For example, if your home is worth $400,000 and your remaining mortgage balance is $150,000, you could borrow up to $170,000-$190,000, depending on the lender’s maximum CLTV ratio.[19]
- Credit score: The best rates and terms go to homeowners with strong credit scores. Some lenders might allow for credit scores as low as 620 with other compensating factors, but many lenders prefer higher scores in the upper 600s and 700s.[20]
- DTI ratio: Typically, lenders do not want this value — which measures your total monthly debt against your total monthly income — to exceed 43%. As part of this assessment, lenders want to ensure you could repay the maximum HELOC balance or the HELOAN amount to qualify.
- Appraisal: A home appraisal is typically required to determine the home’s current value, which impacts how much equity you have. Olivera shares that some lenders allow for a remote appraisal for home equity products to keep the underwriting process moving.
» ESTIMATE BORROWING POWER: See how much equity you can tap with our home equity loan calculator.
Final considerations before applying for a HELOAN
When it comes to using your home equity to fund a renovation, Branson advises keeping your spending to less than 80% of your home’s value across all combined loans. “For HELOANs specifically, factor in the fixed monthly payment alongside your existing mortgage to ensure it fits comfortably within your budget,” says Branson.
One alternate strategy to consider is opening a HELOC as an emergency buffer during your home remodel. Instead of solely using your equity to fund renovations, you’d use any reserved cash savings first and draw from the HELOC when unexpected expenses arise or costs go over budget. Just note that some lenders might charge an inactivity fee if you don’t use the HELOC.[21]
Finally, even the smallest difference in rates can add up to savings over time. Credit unions tend to offer competitive HELOC terms, including fixed-rate options. Some credit unions even offer a hybrid approach that lets you lock in a fixed rate on a HELOC multiple times throughout the repayment period.[22] If you need help shopping around, or if you have a unique financial situation, such as being self-employed, a mortgage broker can assist with finding the right lender and loan product for your needs.
Connect with a loan officer to make a plan
Whether you’re thinking of applying for a home equity loan today or in a few months, talking to a loan officer now can help. An experienced loan officer can look at your current financial profile and advise you on your loan options.
At Best Interest Financial, we provide personalized, white-glove service that big-box and automated lenders can’t. With over 80 years of combined experience and billions in closed loans, our loan officers have the expertise to help identify creative financing possibilities that others miss.
No matter what your timeline is, we can help you develop a strategy to reach your goals. Get a free, 60-second quote from Best Interest today to learn more.
» PLAN YOUR BUDGET: Use our home improvement loan calculator to estimate monthly payments on your remodel.
FAQ
What disqualifies you from getting a home equity loan?
If you don’t meet a lender’s criteria, you can be disqualified from getting a home equity loan. For example, your credit score might be too low, or your DTI ratio might be too high, suggesting that your finances can’t handle additional debt. Or you might not have built enough equity in your home to be able to draw from it.
What happens if you sell before a home equity loan is paid off?
When you sell your home before you’ve paid off a home equity loan, the sale proceeds go toward paying off the loan balance. But if you have an outstanding primary mortgage balance, the sale proceeds go toward paying off that mortgage first. Any unpaid loan balances remaining after the sale proceeds have been used up must be paid for out of pocket.[23]
What is the 30% rule for renovations?
This rule suggests that homeowners should not spend more than 30% of their home’s value on renovations. Let’s say you owe a home worth $300,000. The 30% rule would mean not spending more than $90,000 on your home project.[24]
What kind of loan do you get for a remodel?
To fund a home remodel, you could get a home equity loan or HELOC if you have sufficient equity and meet other qualifying criteria. Another option is a personal loan, although interest rates are typically higher on these products. If you don’t mind losing your current interest rate on your mortgage, you could do a cash-out refinance.
Should you open a HELOC before you need it?
Yes, you can open a HELOC before you need the money. Many people open a HELOC as a source of emergency funds. But keep in mind the length of the draw period and your timeline for needing the funds. Some lenders might also require a minimum draw when you first open the account, and some might charge an inactivity fee.