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Financial Tips & Guides
 Home Equity Loan vs Home Improvement Loan

Home Improvement Loan vs Home Equity Line of Credit

Updated on January 2, 2024


Typically, your house is your most valuable financial asset. Homes usually increase in value over time. You can build equity by fixing your porch or adding insulation to your attic.

Furthermore, it's crucial for individuals to regularly undertake key home improvements that boost comfort and safety.

Initiating a home project, whether it's a major renovation or a remodel, can be a huge endeavor. Identifying the appropriate financing option can facilitate a smoother process and lessen the financial strain.

Presently, homeowners have several financing options at their disposal. However, home equity loans and home improvement loans are two commonly chosen options.

Various loan types come with different terms, requirements, and amounts. Understanding these specifics can assist you in selecting the most suitable loan for your project. We'll dissect everything you need to know about home equity vs home improvement loans before you proceed with an application.

Fortunately, there are alternatives available if you require additional money to upkeep, fix, or enhance your house. You can opt for a home equity loan or a home improvement loan to upgrade your property. The extent of your improvements and your financial situation will guide you in choosing the most suitable loan option.

What is a Home Equity Loan?

A home equity loan is a secured loan where homeowners can borrow money using their home equity as collateral. Home equity is the market value of your property minus any liens, such as your mortgage, that you may have. If your house is worth $300,000 and you still owe $170,000 on your mortgage, you have equity of $130,000.

How Does a Home Equity Loan Work?

Home equity is the part of your home that you own. Understanding this makes it simpler to grasp how home equity loans function.

You must have some equity in your property to qualify for a home equity loan. The lower your home equity, the smaller amount you can borrow. Lenders allow you to borrow up to 85% of your home's value with a home equity loan.

Home equity loans function similarly to first mortgage loans in many ways. If you are approved, you will get a loan. You must repay the loan with a fixed interest rate and monthly payments.

The repayment period is for a certain amount of time. As you pay your loan each month, you decrease the amount you owe and also pay some of the interest. This process is an "amortizing loan."

When taking out a home equity loan, you must be careful about the repayments. The lender can foreclose on the loan and seize your house if you don't make the required repayment terms.

What is a Home Improvement Loan?

A home improvement loan is a personal loan that individuals can use for home repairs and improvements. An unsecured loan means you don't need to put up any property or asset as collateral. These loans usually carry fixed interest rates, allowing you to borrow as little as $ 1,000 to as much as $100,000. However, different lenders could have diverse borrowing ranges based on state laws and their own lending rules.

How Does a Home Improvement Loan Work?

Home improvement loans work more or less the same as any other personal installment loans. You can choose from various lenders for a home improvement loan, including online lenders with simple and fast application processes. Many lenders provide fast approval for loan applications. This means you can apply as soon as you know the amount you need to borrow and understand your credit situation.

Once approved, you'll get your funds from a personal loan for home improvements at once. You can use these funds for almost anything associated with your home improvement project. Your repayment period also starts along with loan disbursement. During this time, you'll be making regular fixed payments throughout the life of your loan.

A home improvement loan ensures the safety of your home, even if you fail to repay the loan. This is unlike home equity loans. However, defaulting on a loan can initiate debt collection, negatively affect your credit report, and lead to a lawsuit, too.

Similarities Between a Home Equity Loan & Home Improvement Loan

What Are the Similarities Between a Home Equity Loan & Home Improvement Loan?

Home improvement loans and home equity loans function similarly. Still, the rates and conditions may vary mainly because of the collateral aspect. Both funding options offer fixed interest rates that borrowers determine when borrowing and that remain the same throughout the loan term.

When the lender accepts your application, home equity and personal loans for home renovation loans function in the same way. Once approved, the lender will deposit the entire loan amount into your bank account. You must start repaying the lender based on your individual loan option repayment plan.

You can use the proceeds from a home improvement loan for any purpose, just like a home equity loan. But, many people choose to use the funds to invest in their homes.

Difference Between a Home Equity Loan and a Home Improvement Loan

To make a better choice, it's important to understand the differences between lending options when deciding which one suits your needs. Here is how a home equity loan varies from a home improvement loan based on some key loan features:

Type of Collateral:

The use of collateral is the most notable difference between a home equity loan and a home improvement personal loan. Using your home as collateral for a home equity loan is less risky for lenders compared to home improvement loans. On the other hand, most home improvement loans are unsecured and don't require you to pledge any of your assets.

Loan Amount:

The loan amount is another distinction between home equity loans and loans for home improvements. You can borrow a significant amount with a home equity loan if you've built more home equity. Most lenders let you borrow around 80% to 85% of your home equity when you get a home equity loan. Your ability to repay, your income, and your location determine the loan amount for a home improvement.

Interest Rate:

Home equity loans offer lower interest rates than home improvement loans because they use your home equity as collateral. These generally are fixed-rate loans, so you'll know how much you will pay monthly. Home improvement loans also come with fixed interest. Still, the rates vary widely depending on the lender's policies and governing state law.

Loan Process:

Using collateral makes obtaining a home equity loan more time-consuming and complicated than a home improvement loan. Multiple parties may review your application when you apply, including a loan processor and an underwriter. The lender might request documentation from third parties like appraisers and title companies.

So, applying for a home equity loan may take a month or even more. Sometimes, you can apply for a home improvement loan and get funds as soon as the same day.


Home equity loans have more extended terms and lower APRs than home renovation loans. Home equity loans usually have terms of five to twenty years, although they can even go as long as thirty years. Home improvement loans have terms of 2-5 years, but some lenders offer loans with terms up to 10 years.

Closing Costs:

A home renovation loan often doesn't have closing charges, but a home equity loan does. When you obtain a home equity loan, you typically need to pay a percentage of the loan amount for closing costs. This percentage usually falls between 2% and 5%. Thus, your closing fees for a $200,000 loan will fall between $4,000 and $10,000.

Pros & Cons of Home Equity Loan Vs. Home Improvement Loan

Pros & Cons of Home Equity Loan vs Home Improvement Loan

Like any other credit option, both home renovation and home equity loans have their own set of advantages and disadvantages.

Pros of Home Equity Loans

  • Comparatively lower interest rates secure a home equity loan than many unsecured loans.
  • Home equity loans use your house's value as collateral, allowing you to borrow large amounts of money. They are easier to qualify for compared to other types of loans.
  • Your payments remain constant throughout the loan. This is because you borrow the entire amount of money at once and have a fixed interest rate.
  • You can use the funds from a home equity loan for any purpose.
  • You can deduct the interest from your taxable income if you use a home equity loan for house improvements. These improvements are tax deductible.

Cons of Home Equity Loans

  • You risk losing ownership of your house through foreclosure if you fall behind on your payments.
  • As with most secured loans, you'll almost certainly have to pay closing expenses. These fees may account for 2% to 5% of the total loan amount, which can increase your cost of borrowing.
  • If you already have a primary mortgage, getting a home equity loan would mean you have two mortgage payments. Such a situation could lower your available income and tighten your monthly budget.

Pros of Home Improvement Loans

  • You can enjoy the benefit of regular payments because home improvement loans have fixed interest rates.
  • You can borrow money for home improvement based on your needs and credit history. The loan can be for a small amount and a short time or a large amount and a longer time.
  • Home improvement loans can improve your credit if you pay on time and lenders report positive info to credit bureaus.
  • With unsecured personal loans, borrowers don't require collateral to qualify. Thus, borrowers don't risk losing their house if they default on the payments.
  • HELOC or home equity loan funding takes weeks. However, online home improvement loan applications take minutes. Additionally, funds are available within a day or two.

Cons of Home Improvement Loans

  • Lenders charge more interest on home improvement loans than home equity loans because they lack collateral.
  • Unlike mortgage interest, you cannot deduct the interest on personal loans for home improvements from your taxes.
  • You can be responsible for paying expenses, including origination fees and late fees. That can raise the total cost of your loan.

Which Loan Option Is the Best Fit for You?

Choosing the right financing option always depends on your unique financial situation. That means deciding based on what you want from your loan and how you intend to spend the funds.

Both home improvement and home equity loans offer borrowers a lump sum at a fixed interest rate. However, they both also vary on various grounds. After learning about the features and advantages and disadvantages, here's advice on which loan option is likely to suit your needs.

When Home Equity Loans Make Sense

When Home Equity Loans Make Sense

Homeowners with 15% equity in their home can choose home equity loans instead of personal loans with higher interest rates. When you know how much you must borrow, compare lenders offering home equity loans. Once you've decided on a lender, apply and proceed as directed to finish the procedure.

Lenders need an appraisal for home equity loans. Approval for these loans can take longer than for personal loans. A home equity loan can be a good choice when you've estimated the cost of your home improvement project. Many people use home equity loans for home improvements to borrow against their property and increase its value.

Lastly, home equity loans have a lower fixed interest rate than other loans because they are less risky for lenders. Using a home equity loan is smart for lower borrowing costs and tax benefits on interest payments.

When Home Improvement Loans Make Sense

You can rely on a home renovation loan to carry out minor home modifications or want to avoid losing your home. Since the loan is unsecured, your property will be safe even if you make late payments. Home improvement loans are a good choice for new homeowners. They provide money for renovations and help build home equity.

Another reason to get a home improvement loan is that it provides fast funding. In addition, these personal loans typically have a simple, quick application process.

With low fees, you can get approval for a home improvement loan more rapidly than home equity loans. So, you need help paying for an urgent home repair or any other emergency financial situation. In that case, you can look for a home improvement loan lender.

Find lenders who offer the loan amount you want and also provide loans for clients with credit scores in your range. Then, prequalify with at least three lenders to guarantee you receive the most excellent deal.


The fundamental difference between home improvement and home equity loans is the use of collateral. Collateral can reduce costs for a home equity loan. However, a home improvement loan without collateral can offer fast funding. Additionally, it eliminates the risk of losing your house.

Comparing home equity line of credit vs home improvement loans will help you decide which loan is best for you. It's also important to note that the most suitable loan for you differs from the one with the best interest rate. That is why you must compare offers from various lenders to help you obtain the most affordable rates and favorable terms.

Photograph of author Joseph Priebe

Joseph Priebe

Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.

With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.

When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.