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HELOC vs. Renovation Loan

HELOC or renovation to pay for home upgrades

The kitchen needs a paint job. No big deal, you could do it in a weekend for a few hundred bucks. However new paint would make the tile look dated… which it is… and you did want to add that extra wall outlet to charge the kids tablets. Updating the tile would make you want to update the cabinets and by this point you realize that the kitchen does in fact need to be entirely updated. As the cost estimates pile up in your head, you have a few options of how best to fund your new kitchen.

A common option is a HELOC (Home Equity Line Of Credit). You like the fact that you only pay on the amount you borrow and are not locked into taking a specific amount. However you realize that you don’t want to pay for your new kitchen with a loan that can adjust multiple times each year. You have a little breathing room every month but not that much.

So how does a renovation loan compare? There are Pro’s and Con’s to each. It really depends on the scope of the project and your financial plans. Let’s review:


  1. Most are tied to the Prime Rate. Therefore, the rate can adjust when the prime does. Prime goes up when the Fed raises the Fed funds rate. Can you handle payment volatility? Ask yourself what your payment tolerance is? Recently we have witnessed the rise of rates by the Fed. More rate hikes are expected as well.
  2. If rates do climb, and payments increase beyond your comfort level, do you have liquid reserves you can use to pay it down or off? If not, consider a lower amount. You can also look at a fixed Home Equity Loan.
  3. HELOC’s are very flexible. Borrow what you want and pay only on that portion. The line remains open for future use.
  4. These are available on owner-occupied homes not investment properties and require a minimum of 10% equity in most cases.

Renovation Loans:

  1. Renovation loans give you access to the FUTURE value of your home. They will take into account the value of your proposed home modifications when determining your down payment. For example, your home is currently worth $500,000. When you update the kitchen the appraiser values the property at $550,000. If you were doing a 95% refinance, then you would only need 5% of equity or $27,500. In this example your LTV is closer to 90%. So, the renovation has created equity which you are immediately able to access for loan purposes. This can help those with high loan to value ratios. Additionally, it can help reduce the interest rate.
  2. Renovation loans can offer higher loan to value ratios. Therefore, whether it’s a purchase or a refinance, not as much capital is needed as compared to a HELOC. Conventional renovation loans, such as Homestyle, go as high as 95% LTV. The FHA 203K renovation loan can go up to 96.5% LTV. And no down payment or equity is required on qualifying VA renovation loans.
  3. One size does not fit all. Renovation loans come in all shapes and sizes. There are renovation loans as small as $1,000 to fund new appliances or small repairs requested by the appraiser. There are complete remodels as well.
  4. Renovation loans offer both fixed rates and adjustable rates to fit your timeline and payment needs.
  5. Finally, some renovation loans can be used for second home or investment properties.

For further questions about what might work best for you, contact us today!

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