How to Choose Between a HELOC and Personal Loan for Your Home Improvement Project

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Home improvements can get pricey. Just redoing your kitchen can cost between $10,000 and $30,000, according to the True Cost Guide from HomeAdvisor. Even building a deck costs, on average, more than $7,000.

If you’re going to make those sorts of home improvements, you’ll probably need a loan. When it comes to home improvements, most people decide on a HELOC versus a personal loan.

Here’s what you need to know to make your decision.

HELOC vs. personal loan: What’s the difference?

Figuring out the difference between a HELOC and a personal loan — and, more important, which works best for your situation — is a challenge. There are a few main points you should know about each option that might help as you plan your next home renovation.

HELOC: The basics

A HELOC, or home equity line of credit, requires that you use your home as collateral to secure the loan.

If you default on your HELOC, the lender has the option to repossess the house. You’re also limited by the amount of equity — or ownership — you have in your home, so if you haven’t built much equity in it, you might not be able to get a HELOC.

One advantage to a HELOC is that it’s a revolving line of credit. As you make payments, you free up more room to borrow again without going through the application process. The interest you pay on your home improvement HELOC can be deducted when you file your tax return.

How a personal loan works

A personal loan, on the other hand, is unsecured.

If you default on a personal loan, a lender can sue you, but it usually can’t take your home. Additionally, with a personal loan, it’s possible to borrow as much as the lender is willing to risk, without worrying about whether you’ve built up value in your home.

But you should realize a personal loan has a fixed term, so if you need more money, you have to reapply for a loan. Plus, you can’t deduct the interest for home improvements made with a personal loan on your taxes.

HELOC vs. personal loan for home improvements
HELOC Personal loan
Collateral needed Yes No
Credit check required Yes Yes
Maximum loan amount Depends on available equity Varies
Tax-deductible interest Yes No
Funded quickly No Yes
Option for revolving credit Yes No

5 questions to ask when deciding on a HELOC vs. a personal loan

When figuring out which type of loan best suits your needs, think through your situation. The following questions can help you decide how to proceed.

1. How much money do you need?

Your first consideration is how much money you actually need to complete your home improvement goals.

“Lenders typically offer financing of up to 70% to 80% on a combined loan-to-value (LTV) ratio,” said Jeffrey Hensel, a broker associate at North Coast Financial.

For example, say you have a home worth $250,000. You still owe $190,000 on it. The lender is willing to finance you up to a combined LTV of 80%. So, the amount of your combined first mortgage and HELOC can’t exceed $200,000. That only leaves you with $10,000 in available equity to borrow against.

While it’s possible to find some lenders willing to finance to a higher combined LTV, said Hensel, you still might not have enough equity in your home to borrow what you need to complete the project.

The longer you’ve been in your home, paying down the mortgage, the more equity you have available to you.

If you don’t have enough equity to fund your project, you might be able to qualify for a personal loan large enough to cover your costs — without putting your home at risk. With a personal loan, you might be able to borrow up to $100,000 depending on your credit and income situation.

If you have a lot of equity in your home, but you have only fair credit, you might be able to get a bigger loan with the HELOC.

2. Do you want flexibility?

An advantage to a HELOC, Hensel pointed out, is the fact that you have more flexibility in how much you borrow — and how much interest you pay.

“You’re only charged interest on the amount of funds currently borrowed against the credit line,” Hensel said. “When you deposit funds back into the credit line, the interest stops accruing on that amount.”

Compare that to a personal loan, where you have a set payment schedule and interest is constant.

On top of that, if you discover the home improvement project is taking longer and costs more than you expected, you might have a hard time getting another personal loan.

With a HELOC, you only take what you need, as you need it. As long as there’s room on the credit line, you can get more money without applying for another loan.

“A HELOC is similar to a credit card,” said David Reiss, a real estate finance professor at Brooklyn Law School. “This can make sense for a homeowner with a seasonal need for credit.”

Because a HELOC can remain open for several years, said Reiss, it’s ideal if you know you’ll have ongoing home improvement expenses.

3. How fast do you need the money?

When you need money fast, a HELOC might not be the way to go. Getting approved for a HELOC can take weeks, according to John Harris, executive vice president of sales and marketing at EnerBank USA, a specialty bank providing unsecured home improvement loans.

With an unsecured personal loan, it’s possible to receive a decision in minutes, Harris said. Not only that, but you can receive funds as early as the next business day.

4. What interest rate can you get?

“With mortgage rates on the rise, the rates on an unsecured loan can be lower than a home equity loan,” said Harris.

While much depends on your credit and income situation, Harris said, the current low-interest environment offers an opportunity for borrowers who want to qualify for the best rates on home improvement loans.

As of May 23, 2018, the national average rate on a $30,000 HELOC is 5.85%, according to Bankrate. But it’s possible to get a personal loan for as little as 4.99%.

Using our personal loan calculator, you can compare the final (principal and interest) cost of a five-year, $30,000 loan at those rates.

If you qualify for the best rate on a personal loan, you could potentially save $714 on interest by choosing a personal loan over a HELOC.

5. Do you want the tax deduction?

Of course, one of the main reasons in choosing a HELOC versus a personal loan is the tax deduction. As long as you use the money you borrow with a HELOC to make improvements to your home, you can deduct the interest you pay on your taxes.

Depending on your tax bracket and the amount of interest paid, the deduction could offset a higher interest rate. Consider a $30,000 HELOC at 5.85% over five years. Here’s what the savings in your first year could look like using Bankrate’s mortgage tax deduction calculator, based on your tax bracket and by assuming a state tax rate of 7%:

  • 10% bracket: $312 (effective interest rate 4.90%)
  • 12% bracket: $348 (effective interest rate 4.79%)
  • 22% bracket: $526 (effective interest rate 4.24%)
  • 24% bracket: $561 (effective interest rate 4.14%)
  • 32% bracket: $704 (effective interest rate 3.70%)
  • 35% bracket: $757 (effective interest rate 3.54%)
  • 37% bracket: $793 (effective interest rate 3.43%)

But you must itemize your deductions to take the deduction, and it’s more valuable the higher your tax bracket.

For some borrowers, even paying a higher interest rate on a HELOC could be worth it for the tax savings.

HELOC vs. personal loan: Next steps

When deciding on a HELOC versus a personal loan, consider what works best for you depending on your situation and your goals for the home improvement loan.

Compare rates and terms, and run the numbers to see what would work best for you — while providing the type of flexibility and time frame you need.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.