Using home equity to pay for a renovation

A HELOC for home renovation, or a home equity loan for home improvement, is a second mortgage that sits behind your current loan. You borrow against equity you already have, your first mortgage stays exactly as it is, and the money goes to the project. A HELOC (home equity line of credit) lets you draw in pieces as the work progresses. A home equity loan, often called a HELOAN, hands you one lump sum at a fixed rate. Firm bid, the loan usually fits. Moving budget, the line usually fits. The calculator below shows roughly how much equity you could reach before anyone asks for your name.

Why equity is usually the cheapest money for a project

Money has a price, and the price depends on what backs it. A credit card is backed by nothing except your promise to pay, so the card company charges for that risk. A personal loan is the same story with a fixed term. A home improvement loan using equity is backed by your house. That security is why second mortgages are generally priced well below unsecured credit.

And if your first mortgage carries a rate from a few years ago, you do not want to give it up. A cash-out refinance replaces that loan with a new one at today's pricing on the whole balance. A second lien borrows only the renovation money. Our HELOC vs home equity loan vs cash-out refinance page runs that comparison in detail.

HELOC vs home equity loan for a renovation

A HELOC for a phased project

Contractors rarely want the whole amount on day one. A typical schedule is a deposit to start, a draw at rough-in, and the balance on completion. A HELOC matches that rhythm. You open a line up to an approved limit, draw what the contractor needs when they need it, and pay interest only on what you have taken. The rate is variable, tied to the prime rate plus a margin, and many programs allow interest-only payments during the draw period. The full mechanics are on our how a HELOC works page.

A home equity loan for a fixed bid

If you have a signed contract for a set price, a roof replacement for example, a home equity loan is the cleaner tool. You get the full amount at closing, the rate is fixed for the life of the loan, and the payment is the same every month until it is gone. The trade-off is that you pay interest on the whole balance from day one, paid contractor or not, and if the project grows you would need a second loan. See how a home equity loan works for the details.

Fixed scope and fixed price, take the loan. Phased work, multiple trades, or any chance the plan changes, take the line.

A worked example

Projects that tend to add value, and ones that do not

Not every renovation pays you back when you sell, and the loan is yours either way.

Work that usually holds its value is the unglamorous kind. A new roof, updated electrical and plumbing, a replaced HVAC system, new windows and doors. Buyers expect these to work and discount a house where they do not. Kitchens and bathrooms generally return a meaningful share of their cost, with mid-range remodels doing better per dollar than high-end ones. Adding usable square footage, such as a bedroom, a bathroom or an accessory dwelling unit, tends to move appraised value more than cosmetic work. If an ADU is on your list, our ADU financing page covers that project on its own.

Work that usually does not return its cost is the personal kind. Pools, elaborate outdoor kitchens, luxury finishes well above what the neighborhood supports, unpermitted garage conversions, and anything so specific to your taste that the next owner will tear it out. Do those because you want to live with them, not because you expect the house to pay you back.

Timing: start the loan before the contractor needs a deposit

The most common mistake we see is a homeowner who signs a contract, gets a deposit date, and then starts looking for the money. A second mortgage needs an appraisal, a credit review and income documentation. Those steps take real time, and an appraiser's schedule cannot be rushed.

The better order is this. Get bids. Decide roughly what the project will cost. Start the loan while you are still choosing a contractor, so the money is ready when you sign. A HELOC is especially forgiving here because once the line is open it can sit unused with no interest owed until you draw. Close before demolition if you can. An appraiser walking into a kitchen with no cabinets values the home as it sits that day.

What we need

We will tell you exactly which documents apply once we talk. Generally the list looks like this.

• Your most recent mortgage statement, so we know the first lien balance and payment.
• Income documentation. Pay stubs and W-2s for employees. Self-employed homeowners can use our bank statement home equity loan, which qualifies on 12 months of business deposits instead of tax returns.
• Your homeowners insurance declarations page.
• A contractor bid or rough project budget, which helps size the line or loan.

1. Run the number. Use the equity calculator to see roughly how much you could borrow. No credit pull, no contact info.
2. Talk it through. Call or text (916) 755-6080. A loan officer will ask about the project and your first mortgage, and tell you whether a line or a loan fits.
3. Send documents and order the appraisal. We route the file to the program that fits and schedule the appraisal while you finalize bids.
4. Close and pay the contractor. Draw from the line as each stage comes due, or receive the lump sum at closing and pay on the contractor's schedule.

Still deciding? The full FAQ covers equity questions beyond renovations, and pulling equity out of your home walks through every route side by side.