Home improvement loan vs. home equity loan: Which is better?

Planning a kitchen remodel or bathroom upgrade takes time, effort, and most importantly, money. The good news is that there are a few different ways to finance your plans and get the cash to do things the right way.  

Many homeowners choose between a home improvement loan and a home equity loan when financing home renovations. Both options can help fund your project, but with different terms and conditions.

Whether you want a home renovation loan to modernize your space or you’re exploring how to get a home equity loan for home improvements, let's break down what each option offers. Confidently move forward and choose the best financing for your home improvement project.

What is a home equity loan?

A home equity renovation loan lets you borrow money to make improvements against your home’s value. Think of it as a second mortgage that gives you a lump sum of cash upfront, which you repay over a fixed period with a fixed interest rate. You can usually borrow up to 80% of your home's value minus what you still owe on your primary mortgage. Some lenders, like Better, let you borrow up to 90% of your home equity.

With a renovation home equity loan, your home is collateral, so lenders usually offer lower interest rates. Lenders determine the loan amount based on how much equity you have, your credit score, and your debt-to-income ratio. 

Home equity loans for home improvement work well because they can provide substantial funding. Suppose your home is worth $400,000 and you owe $200,000 on your mortgage. In that case, you can borrow up to $160,000 (80% of $400,000 minus your existing mortgage balance), making them a good choice for big remodeling projects that need a lot of money upfront. 

What is a home improvement loan?

A home improvement loan is typically an unsecured personal loan designed specifically for renovation projects. Unlike home equity loans, these don't require your home as collateral, and the approval process is more streamlined. 

While home renovation loans offer smaller borrowing amounts than home equity loans, they can still cover significant projects. You receive the full loan upfront and repay it through fixed monthly payments over a set term of a few years, depending on the lending agreement. But since your home doesn't secure these loans, lenders charge higher interest rates than home equity loans. 

Your credit score, income, and chosen lender determine the average home improvement loan rates you'll receive. Lenders might offer rates in the single digits for people with good credit scores, while they could charge those with fair credit rates in the teens or higher. 

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Home equity loans vs. home improvement loans

Here’s an overview of each option, plus a more in-depth look below.

Feature	Home Equity Loan	Home Improvement Loan
Borrowing amount	Up to 80% of home equity	$1,000–$100,000+
Interest rates	Lower	Higher
Repayment terms	5–30 years	2–7 years
Closing costs	2–5% of the loan amount	Typically lower
Collateral	Your home	None
Approval time	Longer	Shorter
Tax benefits	May be tax deductible if used for home improvements	Not tax deductible

Borrowing amount

Home equity loans allow you to borrow much larger amounts than home improvement loans. With a home equity loan, you can access up to 80% of your home's equity (and 90% with Better). Home improvement loans usually cap out at around $50,000 to $100,000, though some lenders offer higher amounts.

The borrowing limits make sense when you consider the collateral involved. Since your property secures your home equity loan, lenders feel comfortable offering larger amounts, which can help if you do a major renovation like a kitchen remodel, room addition, or whole-house update. But since home improvement loans don’t use any collateral, they’re riskier for lenders. That’s why they won’t let you borrow as much money. 

Bottom line: Choose home equity loans for major renovations over $50,000, and home improvement loans for smaller projects under $50,000.

Repayment terms

Home equity loans offer longer repayment periods, typically 5–30 years, giving you lower monthly payments but more interest paid over time. Home renovation loans have shorter terms, usually 2–7 years, which leads to higher monthly payments but less total interest.

The extended repayment terms of home equity loans can be both an advantage and a drawback. Lower monthly payments make it easier to pay back the loan, especially if you have other large expenses. But by stretching payments over decades, you pay more in total interest. 

Home improvement loans make you pay off the debt faster, which saves you money over time. While the monthly payments are higher, you're debt-free much sooner. 

Bottom line: Home equity loans offer lower monthly payments but cost more over time, while home improvement loans have higher payments but save money on total interest.

Closing costs

Home equity loans have closing costs similar to those of your original mortgage, including appraisal fees, origination fees, and other charges — all of which can add up to 2–5% of your loan amount. 

Home improvement loans have minimal fees. Since you don’t need a home appraisal and the approval process is simpler, upfront costs stay low. Some lenders even offer same-day approval, getting you renovation-ready without a lengthy closing process.

Bottom line: Home equity loans can cost thousands in upfront fees, while home improvement loans typically have minimal or no closing costs. Better rolls closing costs into the loan itself so you don’t have to pay anything out of pocket up front.

Collateral and risks

Home equity loans use your home as collateral, which means you could lose your house if you can't make payments. Home improvement loans are unsecured, so while defaulting will hurt your credit, you won't risk losing your home.

While your house is safer with a home improvement loan, defaulting can damage your credit score, making it harder to get favorable rates on future loans, credit cards, or even affect your ability to rent an apartment or get certain jobs. Some lenders might also try to garnish your wages or use other ways to collect their payment.

Bottom line: Home equity loans risk your home but offer lower rates, while home improvement loans protect your property but cost more and can still damage your credit if you default.

Interest rates and terms

Home equity loans offer lower interest rates because your property secures them, while average home improvement loan rates tend to be higher. But in general, lenders determine the rates you qualify for based on your credit score, income, and overall financial picture, so it differs..

Bottom line: Home equity loans typically offer rates a few percentage points lower than home improvement loans, potentially saving thousands in interest costs.

Home improvement loan vs. home equity loan: Which one should you choose?

The best financing option for your home renovation depends on your specific situation and goals. Think about how much money you need, how fast you need it, and whether you’re comfortable using your home as collateral.

When does a home equity loan make more sense?

A home equity loan might be a better option if you're planning a major renovation that costs $50,000 or more. The lower interest rates can save you thousands of dollars over the life of the loan, especially for large projects like whole-house renovations or additions.

Home equity loans make sense if you want predictable monthly payments and don't mind the longer approval process. Better makes getting a home equity loan straightforward with our streamlined online application. Experience a faster approvals with competitive rates and transparent terms — so you can focus on your renovation instead of paperwork.

See what you qualify for in as little as 3 minutes, with no impact to your credit. 

...in as little as 3 minutes – no credit impact

When does a home improvement loan make more sense?

A home improvement loan works better for smaller projects or when you need money quickly. If your renovation costs $25,000 or less, the easy and fast process of a home renovation loan often makes up for the higher interest rate.

Choose a home improvement loan if you don't have much equity in your home, want to avoid putting your house at risk, or prefer not to deal with closing costs and lengthy approval processes. Home improvement loans also make sense if you plan to sell your home soon and don't want another lien against the property.

Find the perfect financing for your project with Better

Home equity and improvement loans can help fund your renovation dreams, but the best choice depends on your project size, timeline, and how much risk you’re willing to take. 

Home equity loans offer lower rates and higher borrowing limits, but require your home as collateral. Home improvement loans provide quick access to cash without risking your property, but cost more in interest. Remember that a home equity line of credit (HELOC) might also be a good option if you want a revolving line of credit and an adjustable interest rate.

Ready to explore your options? Better’s streamlined online platform makes it fast and easy to apply for home equity loans, refinances, and HELOCs. We offer competitive rates, clear terms, and dedicated support to help you unlock your home's equity for renovation projects. 

Whether you're planning a major kitchen remodel or a whole-house renovation, Better can help you access the money you need to turn your vision into reality. Get started today.

...in as little as 3 minutes – no credit impact