So you’re dreaming of that perfect kitchen or bathroom remodeling, or you’re turning your attic into a cozy home office. However, depending on the size of the room, the quality of the material and the range of the project, the average cost ranges from $20,000 to $100,000, and remodeling a home is expensive. Rather than delving into savings, you decide to borrow. We will also reveal two options. Home equity loans and home improvement loans.
They sound the same, but they are actually quite different. One is essentially the second mortgage. The other is personal loans for steroids.
Dive into what distinguishes home equity loans and home improvement loans and how to choose the right loan that suits your needs.
What is a Home Equity Loan?
Home equity loans allow borrowers to convert all or part of their landlord’s shares into ready-to-read cash for short-term and long-term expenses. Home equity is a part of your home that you own entirely (minus the overall value of the location, mortgage).
Most lenders can rent up to 85% of the value of your home. You are going through the same application process as applying for a mortgage. If approved, you will receive a lump sum in exchange for the fairness you have taken out. Then you will pay off your loan on a monthly payment for 5-30 years.
Homeowners can use it with anything, but one of the most popular uses for home equity loans is actually renovations. However, there are a few things to keep in mind before tapping Home Equity.
To begin with, you are turning your assets into obligations. And the new bill has a higher interest. Your home will secure a loan, so there is a risk that you may lose your home if you can’t keep up with your monthly payments.
“We’re looking forward to seeing you in the process of getting a lot of money,” said Shawn Uehara, area manager at Geneva Financial, a Las Vegas-based mortgage lender. “Did it put you in a better financial position today, or will it potentially worsen?”
What is a home improvement loan?
A home improvement loan – stays true to its name – provides funding to upgrade, repair or enhance your home. There is a fixed interest rate and you will usually pay off your loan in 1-7 years or more.
Unlike a home equity loan, if you can’t pay it back, your home is not on the line. “That’s not collateral,” says Stephanie Kizy, managing partner/loan advisor at Pro Mortgage Funding, an independent mortgage broker based in Novi, Michigan. And it doesn’t have to be a problem if the property changes its hands, as it’s not a home obsession. You can “sell your home, receive revenue and pay back your home improvement loan,” but you can wish, but you have no obligation.
Because the loan is unsecured, your creditworthiness and financial profile determine your approval.
If you think this sounds like a personal loan, then you’re right. A home improvement loan is “a personal loan of the size that someone can do renovation projects. It’s one of the biggest purchases. “It’s a marketing and part of the scale of loans that allow people to take unsecured to do that type of project.”
| Characteristics | Home Equity Loan | Home improvement loan |
|---|---|---|
| Loan size | 5k $5k, but usually a minimum of 5 digits based on home equity | It can be as much as $1k based on income/asset |
| Minimum credit score | In the mid-600s | 600 |
| payment | Lunch cash | Depending on the lender, it can be credit or lump sum payment line |
| interest rate* | 8.04% – 9.24% |
7.00-36.00% |
| Approval/Funding Time | 2-8 weeks | 1 business day – 1 week |
| collateral | It is secured by your home | Not generally |
| Tax deductions possible | If the loan is used to improve your home, interest is deductible | Interest is not tax deductible |
| Repayment period | 5-30 years | 1-7 years |
|
*As of March 2025 Source: Bank rate survey of national lenders |
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Which should you choose: Home Equity Loan or Home Improvement Loan?
The choice of home equity and home improvement loans depends on your needs, finances and tolerance for risk.
When should I get a home equity loan?
Home Equity Loans are ideal for:
- You have at least 50% fairness in your home
- I want to pay as low as possible interest rates
- Large renovations require a large amount of money
- You plan to stay in your home for the long term
The best borrower to bring in a home equity loan has built a key share of ownership over the years, and “repayed the original loan amount or bought it in cash,” says Lynch.
Home equity stakes are “incredibly valuable assets.” With a home equity loan, you can utilize the property’s built-in ownership for modifications, repairs, or even down payments in another home. Obviously, the larger the stock, the more money you can borrow (although credit scores and other finances also play a role).
Furthermore, residential equity loans are attractive as interest rates are usually much lower than personal loans and other forms of consumer debt (currently on an average of around 8.7%, as it is close to mortgage fees). If you are using a loan to repair your home, you may be eligible for a tax deduction. If the funds repair or improve their residence, those who earn items on their tax returns can deduct interest on their housing equity loans.
But remember that your home is collateral and you risk losing it if you missed your payment. And given the size of these loans, these payments can be substantial. “Will I be able to pay an additional $500 or $600 a month with my current debt?” asks uyehara. “A lot of people may not be thinking about it. They focus on the fact that ‘Hey, I can have a beautiful kitchen or bathroom’. But is that the wisest financial decision in today’s economy? ”
When should I get a home improvement loan?
- You haven’t built many home equity yet
- You need to quickly access your funds for emergency repairs
- You don’t want to put your home in danger as collateral
- Your credit is strong enough to qualify for competitive interest rates
A home improvement loan is perfect for those who don’t have a great fairness in their home, or for some reason they don’t want to tap on it. Approvals rely on creditworthiness and financial profiles rather than full underwriting procedures, and the process is usually faster. This is another plus for a home improvement loan, especially if you need money for emergency repairs. Like a home equity loan, your funds may be approaching in days rather than weeks.
But even if you have good credit, prepare for a higher interest rate. Unsecured loans are always more expensive as there is a big risk to lenders as nothing supports debt. The current range of home improvement loan rates is around 7-36%.
Here, your credit score is an important factor. “I want to have better credits, better or better credits to get a decent fee,” Lynch says. “The interest rates are theirs. Most people don’t want to have a poorly credited (home improvement) loan because the interest rates are really a burden.”
Personal loans also tend to be much shorter, usually running for seven years, but can take up to 20 years. If you don’t want to be in debt for decades, that’s a good thing. However, remember that shorter repayment terms can mean higher monthly payments.
Home Equity and Home Improvement Loan Alternatives
If neither home equity nor home improvement loans suit your needs, consider these options.
- Home Equity Credit Line (HELOC). This loan product is a variable council of Home Equity Loan. It is based on a similar standard, but you can gradually withdraw funds, repay them, and borrow them again for a certain period of time. HELOC allows you to pay interest only on those you withdraw.
- 0% APR credit card. Some banks and card issuers generally offer 0% introductory APR cards on new purchases made within the promotional rate period for around two years. 0% APR credit card is perfect for small projects if you can repay your balance within the offer period.
- Refinance cash-out. Lenders may provide cash-out refis. This allows you to borrow more than what you currently have on your mortgage based on your stock interests. Pocket cash differences and apply them for renovations and other needs. Refi’s interest rates are closer to the dominant mortgage fees than the housing capital fees. There are also one debt and one monthly payment, not two.
Home Equity and Home Improvement Loan Conclusion
If you own a fair share of your home entirely and need a substantial total (from the top 5 to six figures) for a major renovation, a home equity loan is the way to go. Like the second mortgage, it offers you a longer repayment period and a lower interest rate. If you can deduct interest on your tax return, the cost of borrowing will be even lower.
However, if you need funding quickly, a home improvement loan may be better. I don’t like putting your home in danger. Or they will be selling it immediately after renovation (if you have a home equity loan, you will need to resolve it immediately and cut off your revenue). The application is much more troublesome and perhaps cheaper as it does not need to cover evaluations or other closure costs. However, you may be able to pay a higher interest rate. Given this cost and short term, home improvement loans may be suitable for low-end projects.
Of course, neither tool is perfect. “Debt comes with trade-offs,” says Kizi. “Sometimes, you can use home improvement projects to increase the value of your home and increase the enjoyment of your home. But it provides additional stress.” However, understanding the pros and cons of each option can reduce many of that stress.
