Best Loan for Your Remodel: Home Equity vs. Home Improvement Loans¹

Homeowners who explore financing options today may encounter various potential solutions, including credit cards, home equity loans and home improvement loans. Property owners should choose the financing option that makes the most sense for their needs based on factors such as the loan purpose, their qualifications, the size of the loan needed and their current home equity.


What is a Home Equity Loan?

A home equity loan, sometimes called a second mortgage, is a loan that uses your home as collateral.

To qualify, homeowners must have equity in their home, typically equaling 20% or more. Expressed as a percentage, equity is calculated by subtracting the amount owed on the current mortgage from the home’s current value. When you apply for a home equity loan, the lender may conduct an appraisal or written estimate of market value to assess the home’s current market value.

Consider this example:
Current market value of home = $300,000
Current mortgage balance (owed) = $240,000 (80% loan to value)
Equity = 20%

Borrowers approved for these home equity loans may receive the funds in a lump sum.

A home equity loan is an independent agreement that should not be confused with a refinance. Refinancing a home involves replacing your current home mortgage loan with a new one.

Benefits of a Home Equity Loan

One of the primary advantages of a home equity loan compared to a home improvement loan is that the funds may be used for consolidating higher-interest debt, higher education costs, home remodeling projects, starting a business and more. Some of the other key benefits include:

Fixed Monthly Payments and Interest Rates

Borrowers often appreciate the predictability of a home equity loan. For example, the interest rate is fixed for the full term, unlike those with variable or “adjustable” rates.

More Favorable Interest Rates

The interest rates of home equity loans are usually lower than those of credit cards, personal loans and other unsecured options.

Potentially High Loan Amounts and Extended Repayment Term

Property owners with a substantial amount of equity in their home may qualify for a large lump sum loan. A home equity loan offers longer repayment terms as well as affordable monthly payments.

Tax Benefits

In many cases, homeowners' interest on a home equity loan is tax-deductible. However, eligibility for these potential tax advantages may depend on factors such as how the funds were used and whether you take the standard deduction or itemize deductions at tax time.


What is a Home Improvement Loan?

Home Improvement Loans are ideal for new homeowners that may not have much equity in their home or homeowners looking for a smaller loan amount. A good credit history and debt-to-income ratio are needed to obtain lender approval.

• Proof of current income: Documentation needed might include pay stubs and tax returns.
• Good debt-to-income ratio (DTI): Your DTI is an indicator or “stress test” of your likelihood of paying your debt obligations by dividing your monthly debt expenses into your gross (pre-tax) monthly income.

Lenders usually require applicants to compile an estimate of the home-related improvements they intend to make, such as renovating kitchens or bathrooms. However, these requirements may vary between lenders.

Benefits of a Home Improvement Loan

As the description implies, home improvement loans are used for home renovations, repairs or additions. Some of the key home improvement loan benefits or advantages include:

No Home Equity Requirement

New homeowners or those who have yet to accrue 20% equity in their homes are good candidates for home improvement loans.

Fast Application Process

Applicants should expect a convenient application process with no appraisal requirements.

Flexible Repayment Terms

Lenders often extend the monthly repayment schedule (term) up to 10 years,² which provides predictable, fixed monthly payments that are relatively affordable.


Home Equity Loan vs. Home Improvement Loan: Key Differences

When deciding between a home equity loan and a home improvement loan, consider the following factors:

Collateral and Risk

Unlike a home improvement loan, a home equity loan uses your home as collateral.

Interest Rates

One of the key home equity loan benefits is that borrowers typically have more favorable interest rates because lenders have your home as a collateral asset. Interest rates vary with market conditions.

Loan Amounts

Homeowners usually qualify for home equity loans equaling up to 80% of their current equity, which may exceed $100,000 in high-value homes. The maximum home improvement loan amounts vary among lenders and the size of the anticipated home project. For example, a GECU Home Improvement Loan typically can go up to $30,000.


Which Loan is Right for You?

Consider Your Equity

Property owners with at least 20% equity in their home may consider a home equity loan.

Think About the Project Size

The costs of home improvement or renovation projects may vary widely, as many lenders limit the maximum home improvement loan amounts available.

Assess Your Financial Situation

Every homeowner has unique financial circumstances in terms of income, current debt, credit history, home equity and more. Potential borrowers are encouraged to closely assess the manageability of any loan commitment within their household budget and adhere to the best practices regarding their debt-to-income ratio and other budget considerations.

Secure a Loan Today

Homeowners should assess key variables such as the size and scope of the improvement project, current equity, risk tolerance and affordability when considering a home equity loan vs. home improvement loan. GECU provides eligible members with these and a wide array of other financing options. Our team of experienced professionals looks forward to speaking with you.


Membership eligibility is required.
¹All loans are subject to credit qualification and approval. Rates and terms are based on borrower’s credit qualifications and are subject to change. For GECU Home Equity Loans, the property must be located in Texas or New Mexico. Certain fees and other conditions apply.
²GECU Home Improvement Loan payment example: 120 monthly payments of $13.76 per $1,000 borrowed at 10.90% APR. Actual payment obligation may be greater.