Home equity loan vs. home improvement loan: Which is best for financing your next renovation or update?

Summer renovation season is upon us, and after years of building equity in your home, you might be considering some much-needed home upgrades or aging-in-place modifications while the warm weather hangs on. With home renovation costs ranging from $17,000 to $70,000 or higher, according to a 2025 Houzz report, the right financing is an increasingly important consideration for all budgets.

As borrowing rates come down, both a home equity loan and a home improvement loan can help fund your home remodel projects. Yet each of these two options serve different needs and come with distinct pros and cons. Here’s how to decide which type of loan may work better for you — or an alternative source of financing instead.

What is a home equity loan?

A home equity loan is a type of secured loan that turns your home’s equity — the difference between your home’s current value and your mortgage balance — into cash you can borrow. These loans are sometimes called a second mortgage. And like a primary mortgage, they’re secured by your property and offered by banks, credit unions and online lenders.

You can access your home equity in two ways:

Home equity loan (HELoan). Provides a lump sum of cash with fixed interest rates and predictable monthly payments over five to 30 years.
Home equity line of credit (HELOC). A revolving line of credit that works like a credit card, offering variable interest rates and flexible borrowing during a five to 10-year draw period.

Currently averaging 8.26% for HELoans and 8.27% for HELOCs, according to Bankrate, these loan options are ideal for strategic uses like major home improvements or updates. Yet while these types of loans offer advantages over home improvement loans — including lower rates, larger amounts and longer loan terms — your home serves as the loan’s collateral, putting this important asset at risk of foreclosure if you default.

💡 Expert tip: Compare multiple lenders, including credit unions, which usually offer the most competitive rates. Digital lending marketplaces like LendingTree could be helpful, if you’re unsure where to start. Many lenders waive HELoan and HELOC closing costs if you meet their requirements, and some offer promotional rates that can lower your costs in the first year.

💰 What can I expect to pay on a $50,000 home equity loan?

For a $50,000 home equity loan at a rate of 8% APR, monthly payments could be around $606 on a 10-year term or $418 on a 20-year term.

You’d pay interest totaling $22,797 on the 10-year term versus $50,373 on the 20-year term — a difference of $27,576.

Benefits of a home equity loan

Lower interest rates and potential tax benefits. Because these loans are secured by your home, they typically offer lower rates than unsecured options like personal loans or credit cards. You may be able to deduct interest on your tax return if you can show the IRS that the funds were used to “buy, build or substantially improve” your home.
Higher maximum amounts and longer repayment terms. While home improvement loans typically cap at $50,000 to $100,000, you’re able to borrow up to 85% of your home’s equity (primary mortgage and home equity loan combined). And with repayment periods of up to 30 years, monthly payments can be significantly lower (though the total interest paid will be higher).
Flexibility in how you use funds. Like personal loans, home equity loans can be used for various purposes, such as debt consolidation, education expenses or medical costs — although it’s important to weigh the potential drawbacks of using home equity this way.
Rate flexibility with HELOCs. If you choose a HELOC, you can take advantage of rate decreases over time, potentially lowering your borrowing costs. This flexibility can work in your favor as market conditions change over time.

Drawbacks of a home equity loan

Risk of foreclosure if you default. If you get behind on payments, you could face foreclosure — a serious risk at any age, but more so if you’re in or nearing retirement with a fixed income.
Impact on property taxes. Significant home improvements may increase the assessed value of your home, potentially raising your property taxes.
Longer approval process. Home equity loans require appraisals, title searches and steps similar to a mortgage, potentially resulting in a longer process than a home improvement loan.
Potential for overextending. The ability to borrow large sums against your equity might tempt you to take on more debt than necessary.
HELOC payment shock. With HELOCs, your payments could increase significantly when the draw period ends and you start repaying both principal and interest.

💡Expert tip: A good rule of thumb is to tap into your home equity only if you have a better use for the money than it sitting there on paper. For example, using equity for energy-efficient upgrades could lower utility bills (and maybe even your homeowners insurance costs), while aging-in-place modifications could help avoid costly assisted living expenses down the road.

🔍 Learn more: The truth about no-appraisal home equity loans: What borrowers need to know

What is a home improvement loan?

A home improvement loan is a type of personal loan marketed for home renovations and repairs. Unlike home equity products, they’re unsecured loans that don’t require collateral. Offered by banks, credit unions and online lenders, rates range widely from around 7% to 36% APR, depending on your creditworthiness.

These loans work like any personal loan: you receive a lump sum and make fixed monthly payments over a set term, usually two to 12 years. While loan amounts vary by lender, most cap at around $50,000, though some lenders — like LightStream, LendingClub or a digital marketplace like Credible — offer up to $200,000 for qualified borrowers.

These loans work best for those with good credit who need quick funding for urgent repairs or moderate projects like bathroom updates — especially if you prefer not to use your home as collateral. While rates tend to be higher than home equity loans, a faster approval process makes them attractive to many homeowners.

💰 What can I expect to pay on a $50,000 home improvement loan?

For a $50,000 home improvement loan with a five-year term at a rate of 10% APR, your monthly payments would be $1,062 with $13,741.13 total interest paid over the life of your loan.

With excellent credit and a lower rate of 8% APR, your payment would be $1,014 per month. Total interest paid at 8% would be $10,829.18

Benefits of a home improvement loan

Faster approval and funding. Without the need for home appraisals or title searches, these loans can be approved and funded in one to three days, making them ideal for time-sensitive projects or emergency repairs.
No collateral required. Your home isn’t directly at risk if you encounter financial difficulties repaying these unsecured personal loans, providing greater peace of mind for those in retirement or approaching it.
Fixed rates and structured repayment. Home improvement loans typically offer fixed rates, predictable monthly repayment plans and a set paid-off date to help you plan your budget.
Flexibility as personal loans. Since most home improvement loans are structured as personal loans, you can generally use the money for any purpose. Ask your lender about specific borrowing restrictions before going through the application process.

Drawbacks of a home improvement loan

Higher interest rates. Without collateral to back the loan, rates can be higher than home equity products, averaging 12.65% APR and reaching as high as 36% APR for borrowers with lower credit scores.
Origination fees. If you have fair or bad credit, you’ll likely pay an origination fee of 1% to 10% of your loan amount — that’s $500 to $5,000 on a $50,000 loan.
Impact on property taxes. Significant home improvements may increase your home’s assessed value, potentially raising your property taxes.
Lower borrowing limits. Many lenders cap home improvement loans at $50,000 to $100,000, which might not cover extensive renovation projects.
Shorter repayment terms. Terms typically range from two to 12 years, resulting in higher monthly payments compared to home equity loans.

🔍 Learn more: Best personal loans for 2025: AOL editor picks for consolidating debt, improving your home and more

How to choose: Home equity loan vs. home improvement loan

Consider a home equity loan or HELOC if:	Consider a home improvement loan if:
• You’ve built up significant equity of at least 15% to 20% and are comfortable using your home as collateral • You need to borrow more than $50,000 for major renovations • You want lower rates and can qualify with a credit score of at least 620 • You prefer longer repayment terms with lower monthly payments • You’re planning large, strategic improvements	• You need funds quickly for urgent repairs • You prefer not to risk your home as collateral • You have a good credit of 670+ and can qualify for competitive rates • You’re comfortable with higher monthly payments over a shorter term • Your project costs less than $50,000

💡Expert tip: If you’re making medical-necessary modifications like wheelchair ramps or walk-in showers, check with your tax advisor or a financial advisor specializing in retirement — these improvements might be tax-deductible.

🔍 Learn more: How to find a trusted retirement advisor: Factors to consider for peace of mind

At a glance: Home equity loan vs. home improvement loan

	Home equity loan or HELOC	Home improvement loan
Collateral required	Yes — secured by your home	No
Interest rates	Fixed or variable rate starting at 6% APR and higher	Fixed rate, from just below 7% to 36% APR
Credit score requirement	Typically 620+, but 740+ for the best rates	As low as 300, but 670+ for best rates
Repayment terms	5 to 30 years	2 to 12 years
Loan amounts	Up to 85% of equity	Up to $100,000
Turnaround time	2 to 4 weeks	As soon as same day
Closing costs	2% to 5%, but often waived by lenders for meeting certain requirements	1% to 10% origination fee for fair or poor credit borrowers
Tax benefits	Interest potentially tax-deductible for home improvements	No tax deductions
Impact if you sell	Must be paid off	Not required to be paid off if you sell
Best for	Larger projects, lower rates	Quick funding, protecting equity

🔍 Learn more: How hard is it to get a HELOC? Key requirements for approval in 2025

Alternatives for financing your next home improvement project

While home equity and personal loans may work well for some, other options might better suit your financial situation:

Contractor financing. Many electricians, plumbers and other contractors offer 0% interest payment plans for a set period of time. But carefully review the terms — you’ll be on the hook for all deferred interest if it’s not paid off during the promotional period.
401(k) loans. You can borrow up to $50,000 or 50% of your vested balance (whichever is less) from your employer retirement account. But carefully consider a 401(k) loan since it impacts your long-term retirement savings.
Portfolio-secured loans. Some investment firms and banks offer loans secured by your investment portfolio at competitive rates, which could be an alternative to tapping into your home equity.
0% intro APR credit cards. Best for smaller projects, some cards offer 0% APR promotional periods on purchases, giving you time to pay off new charges without accumulating additional interest.
Cash-out refinance. A cash-out refi might be worthwhile if you can lower your current mortgage rate or if you’re interested in refinancing your ARM due to upcoming rate adjustments.
High-yield savings or CDs. For those who can wait, building up your savings in a high-yield savings account or CD paying out up to 4% and higher can be a financially smart move, helping you to avoid a high-interest loan.

🔍 Learn more: Cash-out refinance vs. home equity loans: Which is best in today’s market?

FAQs: Tapping your equity and updating your home

Learn more about how home equity and home improvement loans work with these common questions. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.

What credit score do I need for each type of loan?

For home equity loans and HELOCs, most lenders require a minimum credit score of 620, though you’ll get better rates with scores above 700. Home improvement loans typically require higher credit scores, usually 670+ for competitive rates, with the best rates reserved for borrowers with scores above 740.

Can I protect myself against rising rates with a HELOC?

Yes, look for HELOCs with fixed-rate conversion options. These let you lock in favorable rates on portions of your balance when rates are low.

I’m looking to sell my home, but I’m not sure what to fix. What upgrades do I need for a successful sale?

While it’s important to put your best foot forward, it’s equally important to avoid “over-improving” your home. When preparing your home for a sale, it’s easy to get caught up in making everything perfect. However, many common fixes and upgrades simply aren’t worth the investment. And more often than not, the highest-return presale improvements are actually low-cost updates. Learn seven updates to skip — and how to avoid wasting money — in our guide to what not to fix before selling a home.

What happens to these loans if I decide to sell my home?

Home equity loans and HELOCs must be paid off when you sell your home, typically from the sale proceeds. Home improvement loans, being personal loans, aren’t tied to your home — you’ll continue making payments even after selling.

Do I need an appraisal for a home equity loan?

While many home equity loans require an appraisal to determine your home’s current value, if you’ve recently bought your home and have excellent credit, you might be able to find a lender that offers no-appraisal home equity loans. These loans use digital tools and hybrid models that assess your home’s features and recently sold homes in your neighborhood, among other factors, to determine your home’s value. Start with specialty digital lenders like LendingTree or Rocket Mortgage. And learn how they work and what to expect in our guide to no-appraisal home loans.

Can I use a home loan to pay down high-interest debt?

Yes. Typical interest rates on home equity loans are lower than those of the average credit card and personal loan, and could be significantly lower the interest amount you’ll pay on these separate debts. But there’s a lot at stake if you aren’t able to repay your home equity loan on time, including the potential loss of your home to foreclosure. Make sure any new loan you take on offers enough wiggle room in your budget for emergencies and unexpected expenses. Learn more about the risks and rewards in our guide to using your home’s equity to pay off debt.

Can I borrow 100% of my home’s equity with a home loan or HELOC?

No, this is a common misconception about home loans. Very few lenders will finance a loan for 100% of your home equity. Most legitimate lenders allow you to access up to 80% or 85% of your home’s equity, depending on your credit score and the lender. We debunk similar misconceptions for this type of borrowing in our guide to the top common home equity myths.

Sources

About our writer

Kat Aoki is a seasoned finance writer who’s written thousands of articles to empower people to better understand technology, fintech, banking, lending and investments. Her expertise has been featured on sites like Lifewire and Finder, with bylines at top technology brands in the U.S. and Australia. Kat strives to help consumers and business owners make informed decisions and choose the right financial products for their needs.

Article edited by Kelly Suzan Waggoner

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