Home renovation loan options are various types of financing solutions that homeowners can use to fund home improvement or remodeling projects. These loans are designed to cover the costs associated with renovations, repairs, or additions to a property, helping homeowners increase the comfort and resale value of their homes.
While traditional home renovation loan options like HELOCs, personal loans, and FHA 203(k) loans are popular, they limit the amount you can borrow because they only use the current value of the home.
Instead, RenoFi loans are designed specifically for homeowners who want to renovate. They let you borrow on average 11x more money than traditional loan options by using your after-renovation home value without refinancing your current mortgage or dealing with lengthy inspections.
In this guide, we’ll explore traditional home renovation loan options and explain why RenoFi loans might be a better fit for your renovation needs.
Traditional Home Renovation Loan Options
1. Traditional Home Equity Loan
Many homeowners choose home equity loans to finance their renovation projects and borrow against the equity they’ve built in their homes using a second mortgage.
Equity is the difference between your home’s current market value and your outstanding mortgage balance. A home equity loan provides a lump sum that you repay over time with fixed monthly payments and a set interest rate.
Scenario 1 (New Home Purchase): For example, to make the math simple, let’s say you just purchased a $600,000 home:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
You want to spend $150,000 to renovate your new home and increase the value of your home.
Traditional Home Equity Loan Terms:
A traditional Home Equity Loan may offer up to 80% of your home value as a second mortgage in the second lien position (second priority of debt that gets paid out after the 1st), depending on the first mortgage balance.
Home price: $600,000
Current Mortgage Balance: $480,000
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)
Using a traditional Home Equity Loan, you would be unable to borrow any money to renovate your new home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
Home price: $600,000
Current Mortgage Amount: $420,000
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)
Using a traditional Home Equity Loan, only after you paid 10% of your mortgage ($60,000), you would be able to borrow $60,000 for your renovations. However, you are still short $90,000 from the $150,000 that you want to spend renovating your home.
2. RenoFi Home Equity Loan
Instead of only using the equity you have in your house, RenoFi allows you to use the After Renovation Value (ARV) of your home as a lump sum at a fixed interest rate.
For example, if RenoFi assesses your renovation plan and believes you will increase the value of your home from $600,000 to $750,000, RenoFi loans will allow you to take a loan against the future ARV (After Renovation Value) of your home of $750,000. Let’s walk through an example where you want to spend $150,000 to renovate your new home and increase the value of your home by $150,000:
Scenario 1 (New Home Purchase):
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Without RenoFi loans, you would not have been able to borrow the $150,000 needed to add the renovations that would increase the value of your home by $150,000. Now, with RenoFi loans, you are now able to get the loan you need to add the renovations you want to your home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Loan Amount:
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Here’s a summary of the difference between traditional and RenoFi home loans in table form:
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
RenoFi loans are funded on the day the loan is closed and that is it. Take out the $195k and you get $195k in your bank and you have 20 years to pay off in equal monthly payments with interest and principal, just like a standard mortgage.
3. Traditional Home Equity Line of Credit (HELOC)
Just like a credit card, you can borrow money with a HELOC up to a pre-approved limit, but the equity in your home backs it. HELOCs have variable interest rates and let you draw funds as needed, making them ideal for long-term or ongoing renovation projects.
Scenario 1 (New Home Purchase): Using the same scenario from above:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
- Renovation Loan Amount Needed: $150,000
Traditional Home Equity Line of Credit Terms:
A traditional Home Equity Line of Credit may offer 80% of your home value:
Home price: $600,000
Current Mortgage Balance: $480,000
Example Home Equity Line of Credit % of Home Price: 80%
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit Amount)
Using a traditional Home Equity Line of Credit, you would be unable to borrow any money to renovate your new home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
Home price: $600,000
Current Mortgage Amount: $420,000
Example Home Equity Line of Credit % of Home Price: 80%
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)
Using a traditional Home Equity Line of Credit, only after you paid 10% of your mortgage ($60,000), you would be able to borrow $60,000 for your renovations. However, you are still short $90,000 from the $150,000 that you want to spend renovating your home.
4. RenoFi Home Equity Line of Credit (RenoFi HELOC)
Unlike traditional loans, RenoFi HELOCs allow you to use your home’s After Renovation Value (ARV), which can 11x your borrowing power.
Scenario 1 (New Home Purchase): Using the same example above of borrowing $150,000 for renovations to increase the value of your home by $150,000:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
RenoFi HELOCs provide a line of credit secured by your current home.
Example RenoFi HELOC Terms:
Years to use credit line: 10 Years
- Interest Only Period: 10 Years
Credit Amount: $195,000
Repayment Term: 15 years
In this example, you’ll have 10 years to use your credit of $195,000. Within those 10 years, just like a credit card, if you borrow against the credit line and pay it back, you will not pay interest.
However, for anything borrowed against your credit, that you do not pay off immediately, you will only pay interest during the first 10 years and then interest and principal after year 10.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Line of Credit Amount:
Example Home Equity Line of Credit % of Home Price: 80%
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
5. Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a new mortgage that is greater than what you currently owe with a different interest rate and payment amount. Unlike Home Equity Loans, a Cash Out Refinance is a brand new loan with a different interest rate rather than a second loan on top of your existing loan.
Scenario 1 (New Home Purchase): Using the same example above
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)
Similar to the situation with Home Equity Loans and HELOCs, with a traditional Cash Out Refinance on a new property, you would be unable to withdraw any money for renovations.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Cash Out Refinance Amount:
Example Cash Out Refinance % of Home Price: 80%
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Cash Out Refinance Amount)
Again, since you are only able to withdraw $60,000 using a traditional cash out refinance, you are still unable to get the $150,000 you wanted for your home renovations.
6. RenoFi Cash-Out Refinance
Similar to other RenoFi products, with a RenoFi Cash Out Refinance, you can receive a larger amount of cash based on the After Renovation Value (ARV) of your home.
Scenario 1 (New Home Purchase): Using the same example above
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Cash Out Refinance Amount)
By writing a loan against your equity in the after-renovation value of your home, RenoFi allows you to borrow funds for renovation against $750,000 versus $600,000. This increases your loan amount from $0 to $195,000, allowing you to borrow infinitely more than a traditional Cash Out Refinance for renovations.
This allows you to receive the $150,000 you were looking for with house renovations and even offer $45,000 above what you were asking for in case you needed more money for renovations.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Cash Out Refinance Amount:
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Cash Out Refinance Amount)
Using a RenoFi Cash Out Refinance, you have increased your loan amount from $60,000 to $255,000 because the RenoFi loan is written against the assessed after renovation value (ARV) of $750,000.
Again in this scenario, using RenoFi you are able to borrow significantly more than traditional loan options and borrow the $150,000 you are looking for to make your renovations and even have the option to receive $105,000 on top of the $150,000.
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
7. FHA 203(k) Loan
Backed by the Federal Housing Administration, an FHA 203(k) loan combines the cost of purchasing or refinancing a home with the funds needed for renovations.
Depending on the scope of your renovation, you can choose between a Standard FHA 203(k) loan for major structural work or a Limited FHA 203(k) loan for smaller, non-structural updates.
If you are looking for help with a FHA 203(k) loan, RenoFi offers 203k loans through lending partners to help you find lenders for your property.
8. Home Style Loan
Homestyle loans are similar to FHA 203(k) loans, but not limited to first time home buyers and also allow for larger renovations by combining the purchase or refinancing of a home with the costs of renovation into a single loan.
If you are looking for help with a Home Style loan, RenoFi offers Home Style loan through lending partners to help you find lenders for your property.
9. Personal Loans for Home Renovations
If you don’t have sufficient equity or you prefer an unsecured option, personal loans can be a good alternative. These loans don’t require you to use your home as collateral, but they may have higher interest rates than home equity loans since there is no collateral.
If you are looking for help with a personal loan, RenoFi offers personal loans through lending partners to help you find lenders for your property. Typical loan amounts can be up to 100k on 20 year terms, but will not use your after renovation value.
10. Construction Loan
Construction loans fund the building of a residential home from the land purchase to the finished building. While construction loans are a popular choice for renovations, they have some differences compared to RenoFi loans. Construction loans require a full refinance and are based on the current value of your home. They also involve more complex draw schedules and inspections, which can add time and complexity to your project.
In contrast, RenoFi loans are tailored specifically for renovations. They don’t require refinancing your mortgage, have no draw schedules, and leverage your home’s future value, which allows you to borrow on average 11x more money for your renovations. This makes RenoFi loans a more convenient and cost-effective choice for homeowners who want to tackle large-scale renovations without the headaches that come with traditional construction loans.
If you are looking for help with a construction loan, RenoFi offers construction loans through lending partners to help you find lenders for your property.
11. Land Loan
A land loan is used for purchasing land and does not typically include funding for building a home, but it is a first step in a larger building project. There are typically 3 main types of land loans:
- Raw Land Loans: For undeveloped land without utilities or access roads that need larger down payments and typically have higher interest rates
- Unimproved Land Loans: For land with some utilities or access, but still requiring significant development costs
- Improved Land Loans: For land with utilities and access for immediate construction
If you are looking for help with a land loan, RenoFi offers land loans through lending partners to help you find lenders for your property.
12. Government Backed Loan
Below are some government-backed loan programs that can help fund your renovation project:
- VA Renovation Loans: Available to qualified veterans and military service members, VA renovation loans offer a combination of low interest rates and flexible credit requirements.
- USDA Loans: If you’re purchasing a home in a rural area, USDA loans can be used for home improvements with no down payment required.
While these programs can benefit certain homeowners, they have strict eligibility requirements, making them less accessible than other loan options like RenoFi.
If you are looking for help with a government-backed loan, RenoFi offers government-backed loans through lending partners to help you find lenders for your property. Click here to see rates.
Why RenoFi Loans Might Be the Best Choice for Your Renovation
While traditional renovation loans serve their purpose, they often come with restrictions that can limit your project’s scope. For instance, many of these loans are tied to your current home equity, which can be problematic if you haven’t built up enough equity to finance your renovation fully.
On the other hand, RenoFi loans use a unique approach to financing home renovations. Unlike traditional options, RenoFi loans are based on your home’s after-renovation value. This means that if your home is currently valued at $500,000 but will be worth $600,000 after your renovation, you can borrow against that future value, potentially increasing your borrowing power by tens of thousands of dollars.
Key Advantages of RenoFi Loans:
- Higher borrowing limits
- No need to refinance
- Leverage future value
- Contractor-friendly
- Faster approval
Why Homeowners Love RenoFi Loans
RenoFi loans are becoming increasingly popular among homeowners and contractors alike. The ability to borrow based on your home’s after-renovation value is a game-changer, especially if you haven’t built enough equity to use a traditional HELOC or home equity loan. Here’s why more people are turning to RenoFi:
- Increased Borrowing Power: Traditional loans often limit you to borrowing up to 80% of your current home value. Alternatively, RenoFi allows you to borrow up to 125% of your home’s current value or 90% of its future value, whichever is lower. This means more money for your renovation project without the need to refinance.
- No Need to Refinance: With RenoFi loans, you can keep your existing mortgage and its low rate intact while accessing funds for your renovation. This is a huge benefit if you’re locked into a favorable rate and don’t want to refinance.
- Streamlined Process: Unlike other loans, RenoFi loans don’t require complicated draw schedules and inspections. This makes it easier to start and complete your project on time.
Conclusion
Choosing the right home renovation loan can make or break your project. While traditional loans like HELOCs, personal, and FHA 203(k) loans have their place, they often come with limitations that can restrict your renovation plans. But RenoFi loans give homeowners a unique and flexible alternative.
By leveraging your home’s after-renovation value, RenoFi allows you to borrow more without the need to refinance your existing mortgage or deal with complex draw schedules and inspections. Therefore, if you are a homeowner looking to maximize your renovation potential, RenoFi loans are the best choice.
Unlike traditional loans, which are based on your current home value or require you to refinance, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.
Explore your RenoFi loan options here.
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