What is a Renovation Home Equity Loan?

Renovation home equity loans are the smartest ways for homeowners to finance their entire renovation projects. Yet most homeowners are completely unaware these exist & how they work. But don’t worry, by the time you are done reading this post, you’ll be in the know.

What makes a renovation home equity loan so awesome you ask? There are two primary benefits:

  1. Unlike traditional home equity loans, renovation home equity loans are based on what the value of your home will be AFTER the renovation. This key factor dramatically increases how much you can borrow for your renovation.
  2. You don’t have to refinance your first mortgage with a renovation home equity loan. With so many people having fantastically low first mortgage rates locked in, refinancing into a higher rate is the last thing many folks want to do.

Let’s look at a simple example:

Meet the Jenkins family. The Jenkins are looking to do a $250,000 renovation. They purchased their home about 5 years ago and now are ready to do the two story addition and kitchen remodel they’ve been discussing for years.

The home today is valued at $500,000 and they have an outstanding mortgage of $350,000.

To recap:

  • Renovation: $250,000
  • Current home value: $500,000
  • Current mortgage: $350,000

Now let’s compare how much they could borrow with a typical home equity loan (see the first bar below) v. what they can borrow with a renovation home equity loan (the second bar below).

Borrow 5x more with a Renovation Loan

Borrow 5x more with a Renovation Loan

Yes you are reading that chart right, the renovation home equity loan allows the Jenkins to borrow 5x more! Most importantly, they can borrow the full amount of their renovation. With the traditional options, the Jenkins would be $200,000 short!

So what is exactly is happening here? It all comes down to the difference between using the current value of the home v. the future value of the home. The Jenkins are making some big improvements to their home so obviously the value of their home is going to increase.

Current Value vs After Renovation Value

When it comes to traditional home equity loans, the magic number is usually 80%, meaning you can borrow up to 80% of the home value.

So when using the current value of $500k, 80% = $400,000. But the Jenkins have an outstanding mortgage balance of $350,000, so $400k minus $350k = $50k. Thus, by using loan products that use the home’s current value, the Jenkins can only borrow $50k.

Now let’s compare that to using the future value of the home, $750,000.

80% of $750,000 = $600,000. And when you deduct the outstanding mortgage balance of $350,000 from the $600,000, the Jenkins can get $250,000 to renovate!

And there you have it, by taking into consideration the future value of $750,000, the Jenkins are ready to make their renovation dreams come true. Not only are they able to finance their entire project, but they can do it without having to refinance their awesome first mortgage into a higher rate as they would with a traditional construction loan.

Five more things that you should know about renovation loans:

  1. LOWEST RATES! Post renovation, a renovation home equity loan has the same rates as a traditional home equity loan. Compared to personal loans, credit cards or refinancing your mortgage into a higher rate, renovation home equity loans are the lowest cost solution to financing your renovation.
  2. LOWER FEES! Just like a traditional home equity loan, renovation home equity loans have incredibly low fees compared to first mortgages. And because RenoFi partners with credit unions, our renovation home equity loans have the lowest fees in the industry!
  3. CHOOSE YOUR TERM! Just like a traditional home equity loan, you can choose a term of 5, 10, 15 or 20 years.
  4. WORKS FOR PROJECTS OF ALL SIZES Unlike a construction loan which only works for major projects, a renovation home equity loan can be used for something as simple as finishing your basement ($25k-$50k) all the way up to a total home remodel ($250k-$500k+).
  5. DON’T WAIT TO THE LAST MINUTE While these loans are easier than a first mortgage, they still require getting your ducks in a row. On average these loans take 3.5 to 5 weeks to close. We recommend starting the process 6 weeks before you are starting your renovation project to be safe.

There are actually 5 different types of renovation loans! In our next post, the RenoFi team walks you through the details on each. Get the rankings of renovation loans, from best to worst!

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Other information you may be interested in...

  • Introducing RenoFi Renovation Loans - RenoFi was started in early 2018 because of the belief that we could make a difference in millions of homeowners’ lives by empowering them to transform their homes into spaces they love with a smart and affordable financing solution. Today we are announcing that we raised our Series A of $6.4M.
  • 3 Reasons You Shouldn’t Use a Cashout Refinance When Renovating - Refinancing can often be a dumb way to pay for your renovations. If you’re trying to lock in a significantly lower rate, you may be an exception, but for most homeowners, refinancing means throwing money away and getting less out of it. Let us explain. Here are 3 reasons why you shouldn’t use a Cashout Refinance when renovating.
  • What if My Contractor Refuses to Work with a Construction Loan? - Did you know contractors actually hate construction loans? Since these loans will typically cost your contractor more time and money, it’s hard to blame them. But when your contractor actually refuses to work with a construction loan completely, then what do you do?
  • The 6 Dumbest Things Homeowners Do When Paying for a Renovation - You’ll have a lot of decisions to make during your home renovation—how to pay for it is probably the biggest. That’s because making an investment in a home you love right now shouldn’t end up costing you for years to come. But too often homeowners make really bad choices when it comes to financing their project, and that’s exactly what happens.
  • Why Contractors HATE Construction Loans - You finally found a contractor, and you’ve started looking for a construction loan. Hold up! There’s something you should know: contractors HATE construction loans.
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